Sector-Specific Technical Change

1. Sector-Specific Technical Change Susanto Basu Boston College and NBER Jonas Fisher Federal Reserve Bank of Chicago John Fernald Federal Reserve Bank of San Francisco Miles Kimball University of Michigan and NBER Very preliminary

2. Where does growth originate? • Technical change differs across industries • Recent work has highlighted that the final-use sector in which technical change occurs matters • Greenwood, Hercowitz, Krusell • Use relative price data • We reconsider the evidence • Extending GHK to situations where relative pricesmight not measure technology correctly • Top down versus bottom up

3. Outline • Motivation: Consumption-technology neutrality • How to think about terms of trade? • Disaggregating: Manipulating the input-output matrix • Comparing bottom-up versus top-down estimates

4. Consumption Technology Neutrality • When a multiplicative technology shock affects only the production of nondurable consumption goods, with log utility, the stochastic process of the consumption goods technology A does not affect labor hours N, investment I, or an index of the resources devoted to producing consumption goods X.

5. A Simple Social Planner’s Problem

6. An Equivalent Problem

7. Comments • Because ln(A) is an additively-separable term, any stochastic process for A has no effect on the optimal decision rules for N, X and I. • There is a weaker, but still important result for the more general King-Plosser-Rebelo case: if A follows a geometric random walk it has no effect on the optimal decision rules for N, X and I.

8. Empirical Implications: Standard RBC Parameters • With the standard parametrizations of the utility function consumption technology shocks will have very different effects from investment technology shocks. • consumption technology shocks have no effect on labor hours or investment. • investment technology shocks have the same effect on labor hours and investment as pervasive technology shocks. • therefore, like pervasive technology shocks in standard RBC models, investment technology shocks should have a large effect on labor hours and investment.

9. Empirical Implications: Low EIS and Permanent Tech Shocks • With permanent technology shocks and King-Plosser-Rebelo utility and relatively low elasticity of intertemporal substitution (≈ 0.3), investment technology shocks also have very little immediate effects on labor hours, though they do raise investment in a way that consumption technology shocks do not.

10. A More General Question • At a minimum, the example of consumption technology neutrality raises the possibility that different types of technology shocks may have significantly different effects not only on relative prices, but also on aggregate labor hours and investment. • Therefore, we would like to construct technology shocks for goods of different levels of durability to see empirically if these have different effects.

11. Motivation: A novel test of price stickiness • In the log case, a change in consumption technology should have no effect on investment and hours • For plausible deviations from log utility of consumption and permanent technology shocks (lower EIS and AR(1) technology), improvements in consumption technology should raise investment • But with sticky prices, Basu-Kimball (2001) show that improved consumption technology should lower investment and hours in the short run • Reason is that with price stickiness, relative price of consumption cannot jump down on impact • However, consumption technology should have RBC-style effect once effective price stickiness ends

12. Terms of Trade as Technology • In a closed economy, relative prices are always driven by domestic technology • But this is not true with an open economy—the relative price faced by a small open economy can change due to changes in foreign technology or demand • We classify such price changes as “technology shocks” because they enable home consumers to have more consumption with unchanged labor input • View trade as a special (linear) technology, with terms of trade changes as technology shocks • However, this type of technology is special—for one thing, it has very different trend growth

13. Terms of Trade as Technology, cont’d • Thus, need to allow ToT to follow a different stochastic process than more conventional technical change[Do we do this now?] • Ultimately a definitional question:Should ‘technology’ represent a change in the possibility frontier for consumption and leisure, or be restricted to a change in the production functions for domestic C and I? • We use the first, broader, definition. Labeling does not matter, so long as one takes into account both ToT changes and domestic PF shifts