DP4827 | The Effects of Permanent Technology Shocks on Labour Productivity and Hours in the RBC Model

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23/01/2005

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Abstract

Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive permanent technology shock once one allows for the possibility that the process for the permanent technology shock is persistent in growth rates. A more serious limitation of the RBC model is its inability to generate a persistent rise in hours worked after a positive permanent technology shock along with a rise in labour productivity that are in line with what the data suggests.