Technology Shocks Matter

I use the neoclassical growth model to identify the effects of technology shocks on the US business cycle. The model includes two sources of technology shocks: neutral, which affect the production of all goods homogeneously, and investment-specific. Investmentspecific shocks are the unique source of the secular trend in the real price of investment goods, while both shocks are the only factors which affect labor productivity in the long run. Consistent with previous empirical work which considers only neutral shocks, the results suggest these shocks account for little, about 6 percent, of the business cycle variation in hours worked. In contrast, investment-specific shocks account for about 50 percent, a new finding which suggests that technology shocks are an important source of the business cycle.