Identification of Technology Shocks in Structural VARs

The usefulness of SVARs for developing empirically plausible models is actually subject to many controversies in quantitative macroeconomics. In this paper, we propose a simple alternative two step SVARs based procedure which consistently identifies and estimates the effect of permanent technology shocks on aggregate variables. Simulation experiments from a standard business cycle model show that our approach outperforms standard SVARs. The two step procedure, when applied to actual data, predicts a significant short-run decrease of hours after a technology improvement followed by a delayed and hump-shaped positive response. Additionally, the rate of inflation and the nominal interest rate displays a significant decrease after a positive technology shock.