Business Cycles in a Neoclassical Growth Model: How Important are Techology Shocks as a Propagation Mechanism?,” Working Paper

This paper quantitatively investigates the role of technology shocks in propagating business cycles in a neoclassical growth model. I use the new technique of business cycle accounting (BCA) which enables me to maintain the basic framework of a standard growth model, but allows multiple propagation channels (referred to as wedges), technology fluctuations being one of them. My test case is Japan during the period 1980 to 2000. I find that though technology shocks play an important role in propagating market frictions, they are by no means enough to account for the observed economic fluctuations during this period. Shocks that propagate themselves as investment wedges play a major role. A standard RBC model fails to recognize this channel due to the paucity of propagation channels that it allows and consequently tends to overemphasize the role of technology shocks, often at the expense of other channels thus leading to erroneous conclusions