Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations

Abstract

We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent "new shock" literature on revisions of beliefs about the future as a source of fluctuations, but differs by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive effect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a significant role in amplifying other shocks.

Innovation, diffusion, and trade: Theory and measurement

“…7 In my model, however, the pace of innovation and the speed of diffusion are both endogenous. Comin and Gertler (2006) and Comin et al (2009) also model endogenous diffusion in a business-cycle model for a closed economy. I adapt their framework to an open-economy model.…”

News, disaster risk, and time-varying uncertainty

“…In disaster times ðA t o A n Þ, the effective capital is lower than the physical 6 A large body of literature that seeks theoretical models to reconcile with positive co-movement in the data has developed. For example, Beaudry and Portier (2004) apply a three-sector model, Jaimovich and Rebelo (2009) assume a preference specification that minimizes the short-run wealth effect on the labor supply, as in Greenwood et al (1988), and Comin et al (2009) introduce costly technology adoption. 7 For example, using a structural, large-dimensional factor model, Forni et al (2011) conclude that news shocks have a limited role in explaining the business cycle, while Schmitt-Grohe and Uribe (2012) estimate a structural model and argue that news shocks account for more than two-thirds of predicted aggregate fluctuations.…”

“…Although a large body of the literature has developed to generate a positive impact co-movement in response to good news (Beaudry and Portier, 2004;Jaimovich and Rebelo, 2009;Comin et al, 2009), this paper seeks a tractable framework that relies on the interaction of information flows and disaster risk.…”

“…By incorporating information flows and risk of rare events, this paper provides an alternative interpretation of time-varying uncertainty that is consistent with countercyclical forecast errors and more economically plausible. Finally, this paper also relates to the literature on business cycle fluctuations, including news shocks and co-movement (Beaudry and Portier, 2004;Comin et al, 2009), stochastic volatility (Justiniano and Primiceri, 2008), and asymmetric business cycles (Acemoglu and Scott, 1997;Van Nieuwerburgh and Veldkamp, 2006). While these papers explain one feature of business cycles, they are silent on the question of whether the success comes at a cost of missing other business cycle moments.…”

Animal spirits as an engine of boom-busts and throttle of productivity growth

“…In attempting to make a link between endogenous adoption and aggregate fluctuations, I am proceeding in the spirit of Comin et al (2009), who model an endogenous adoption process in response to stochastic shifts in the technology frontier. Unlike Comin et al however, I attempt to investigate the link between endogenous adoption and aggregate fluctuations in the absence of any sudden shocks to the technology frontier, and in an environment where the only form of uncertainty is changes in beliefs about the value of adoption.…”