Technology Shocks and Non-stationary Hours in Emerging Countries and DSVAR

Abstract

We test a standard DSGE (Dynamic Stochastic General Equilibrium) model on impulse responses of hours worked and real GDP after technology and non-technology shocks in emerging market economies (EMEs). Most dynamic macroeconomic models assume that hours worked are stationary. However, in the data, we observe apparent changes in hours worked from 1970 to 2013 in these economies. Motivated by this fact, we first estimate a structural vector autoregression (SVAR) model with a specification of hours in difference (DSVAR) and then set up a DSGE model by incorporating permanent labour supply (LS) shocks that can generate a unit root in hours worked, while preserving the property of a balanced growth path. These LS shocks could be associated with very dramatic changes in LS which look permanent in these economies. Hence, the identification restriction in our models comes from the fact that both technology and LS shocks have a permanent effect on GDP yet only the latter shocks have a long-run impact on hours worked. For inference purposes, we compare empirical impulse responses based on the EMEs data to impulse responses from DSVARs run on the simulated data from the model. The results show that a DSGE model with permanent LS shocks that can generate a unit root in hours worked is required to properly evaluate the DSVAR in EMEs as this model is able to replicate indirectly impulse responses obtained from a DSVAR on the actual data. JEL Classification: C32, E32

A Review of the Impact of External Shocks on Monetary Policy Effectiveness in Non-WAEMU Countries

“…As Rebelo (2005) articulates, the Great Depression was associated with a multitude of shocks that included severe droughts, instability of financial systems, and a substantial decrease in the price of agricultural commodities. Some notable shocks that have been documented in the corresponding literature as significant determinants of business cycles entail fiscal shocks (Baxter & King, 1999;Binge, 2020); productivity and technology shocks (King & Rebelo, 1999;Coskun, 2020); variations in the spending of government (Fisher, 2003;Zouri, 2020); energy price shocks (Rotemberg & Woodford, 1996;Finn, 2000;Zouri, 2020) and monetary shocks (Bernanke, Gertler & Gilchrist, 1996;Binge, 2020). When economies are open, their business cycle movements are affected by external shocks which include, demand shocks, shocks in foreign monetary policy, oil price shocks and terms of trade shocks (Oladunni, 2020; Ezeaku, Asongu & Nnanna, 2021).…”