What Does A Technology Shock Do? A VAR Analysis with Model-based Sign Restrictions

This Paper estimates the effects of technology shocks in VAR models of the United States, Japan and Germany, identified imposing restrictions on the sign of impulse responses. These restrictions are motivated with priors on the parameters of a class of DSGE models with both real and nominal frictions. Estimated technology shocks lead to substantial and persistent increases in labour productivity, real wages, consumption, investment and output. In contrast with most results in the VAR literature, hours worked are much more likely to increase, displaying a hump-shaped pattern. These results are shown to stem primarily from the identification strategy proposed in the Paper, which substitutes theoretical restrictions for the atheoretical assumptions on the time series properties of the data, that are the hallmark of long-run restrictions.