Reaction to Technology Shocks in Markov-switchings Structural VARs: Identification via Heteroskedasticity

Aleksei Netšunajev (European University Institute)

The paper reconsiders the conicting results in the debate connected to the effects of technology shocks on hours in the bivariate system. Given major dissatisfaction with the just-identifying long-run restrictions I analyze, if the restrictions used in the literature are consistent with the data. Modeling volatility of shocks using Markov switching structure allows to obtain additional identifying information and perform tests of the restrictions that were just-identifying in classical structural VAR analysis. I find that standard restriction, identifying the technology shocks as the only sources of variation in labor productivity, is consistent with the data. Taking into account important low frequency movements in the data yields result consistent with the recent findings: hours decline in response to a positive technology shock. I also show that the use of a standard Hodrick-Prescott filter and sign restrictions may be problematic in the context.