American Economic Review: Vol. 96 No. 5 (December 2006)


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Are Technology Improvements Contractionary?

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Basu, Susanto, John G. Fernald, and Miles S. Kimball. 2006. "Are Technology Improvements Contractionary?" American Economic Review, 96(5): 1418-1448.

DOI: 10.1257/aer.96.5.1418


Yes. We construct a measure of aggregate technology change, controlling for aggregation effects, varying utilization of capital and labor, nonconstant returns, and imperfect competition. On impact, when technology improves, input use and nonresidential investment fall sharply. Output changes little. With a lag of several years, inputs and investment return to normal and output rises strongly. The standard one-sector real-business-cycle model is not consistent with this evidence. The evidence is consistent, however, with simple sticky-price models, which predict the results we find: when technology improves, inputs and investment generally fall in the short run, and output itself may also fall. (JEL E22, E32, O33)

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Basu, Susanto
Fernald, John G.
Kimball, Miles S.

American Economic Review

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