Do Technology Shocks Shift Output? An Empirical Analysis of a Two Factor Model

This study identifies the effect of technology shocks on aggregate output using confirmatory factor analysis employed by Griliches, Hall and Pakes (1991). The analysis is based on the assumptions that there are two distinct shocks in an economy, demand and technology shocks, and that the patent data contain additional information on technology shocks. The findings show that, while the patent and R&D data do not contain significant information on technology shocks in the full sample of OECD countries, they do have significant information on these shocks in the G13 countries. The results suggest that, in the G13 countries technology shocks can explain almost all of the unexpected changes in patent stock, half of those in R&D stock and a quarter of the unexpected changes in GDP.