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Identifying and Testing Alternative Measures of Investment-Specific Technology Shocks
- We present a real business cycle (RBC) model similar to Fisher (2006) with two sources of permanent technological change - labor augmenting (neutral) and capital-embodied (investment-specific) shocks. According to the model, a positive labor augmenting shock permanently increases labor productivity, while a positive capital-embodied shock permanently decreases the price of investment and permanently increases labor productivity. Several works (for instance Fisher and Altig, Christiano, Eichenbaum and Linde (2004)) apply these theoretical restrictions in a structural vector autoregression (SVAR) framework to empirically identify these two separate sources of technology shocks. In particular, the long-run restrictions that ($i$) the investment-specific shock is the only shock that can permanently decrease the real price of investment and ($ii$) the neutral and investment-specific shocks are the only shocks that can permanently increase labor productivity can be used to exactly identify the two technology shocks in the SVAR. We show that the standard model and identification approach of Fisher imposes a testable restriction on the dynamics of the real return to capital and the capital-output share that is not supported by the data. We propose alternative ways to calculate investment-specific shocks that are consistent with these restrictions and compare the responses of these alternatively identified shocks to those obtained using the standard identification approach.
