Short-run shocks, longer-run consequences: how business cycle fluctuations affect technological progress

Abstract

This dissertation is composed of four self-contained chapters and complements the recent stream of literature that tries to integrate short-run business cycle fluctuations and long-run technological progress. It therefore adds endogenous technological progress to otherwise standard real business cycle models and takes a look on the longer-run implications of classical business cycle shocks. The first chapter analyses how matching efficiency shocks affect the firm's innovation decision. It is noted that the slowdown in TFP growth during the Great Recession was accompanied by an outward shift in the Beveridge Curve, which is typically thought to be induced by a strong decline in matching efficiency during this time. It is argued that this outward shift in the Beveridge Curve was a major contributor to the slowdown in endogenous TFP growth. The second chapter deals with the longer-run effects of inflation target shocks. If the inflation target is increased, the economy experiences a period of adjustment to the new long-run inflation rate. In a Newkeynesian model, price markups decrease during this period and thus the gain of innovation. The empirical assessment of the model shows that longer-run changes in the inflation target due to inflation target shocks reduce technological progress. The third chapter takes a look at monetary policy and stock market shocks from a more econometric point of view. It is argued that neither short- nor long-run restrictions can be used to identify the SVAR here. A partly recursive, partly data-driven identification scheme to solve this identification problem is proposed and monetary policy shocks are found to have an instantaneous and long-run negative effect on stock prices and output. The fourth chapter examines the effect of true news and noise on technological progress in an SVAR. It is assumed that stock prices and research spending contain information regarding news, while researchers have an informational advantage concerning the truth of research related news. The main result is that true news shocks lead to an immediate increase in research spending and stock prices, while noise shocks that induce the same stock price reaction are associated with a much more cautious response in research spending and a weaker effect on stock prices.