Sector-Specific Technical Change

Abstract: Theory implies that the economy responds differently to technology shocks that affect the production of consumption versus investment goods. We estimate industry-level technology innovations and use the input-output tables to relax the typical assumptions in the investment-specific technical change literature—assumptions that, we find, do not hold in the data. We find that investment-technology improvements are sharply contractionary for hours, investment, consumption, and output. Consumption-technology improvements, on the contrary, are generally expansionary. Thus, disaggregating technology shocks into consumption and investment-specific changes yields two shocks that both produce business-cycle comovement, and also explain a large fraction of annual changes in GDP and its components. Most of the responses we find are consistent with the predictions of simple two-sector models with sticky prices