Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited

This paper re-examines recent empirical evidence that positive technology shocks lead to short-run declines in hours. Building on Gali's [1999. Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations. American Economic Review 89, 249-271] work, which uses long-run restrictions to identify technology shocks, we analyze whether the identified shocks can be plausibly interpreted as technology shocks. We first examine the validity of the identification assumption in a DGE model with several possible sources of permanent shocks. We then empirically assess the plausibility of the shocks using a variety of tests. After finding that the shocks pass all of the tests, we present two examples of modified DGE models that match the facts. (c) 2005 Elsevier B.V. All rights reserved.