What Happens when Technology Improves?

This paper extends the literature that explores the dynamic response of the economy to technology shocks. The shocks used are “direct” measures of aggregate technology, measured as Solow residuals (aka , total factor productivity, or TFP) with an adjustment for variations in labor effort and capital’s workweek. In addition, motivated by the growing body of literature on investment-specific technical change, the quarterly series is also decomposed into utilization-adjusted investment TFP and consumption TFP. As in Gali (1999) and Basu, Fernald, and Kimball (2006), hours worked fall for several periods following an improvement in technology.