Discussion Paper Series 2020-E-8

Investment-Specific Technology Shocks Revisited

Shingo Watanabe

The relative-price approach to identifying investment-specific technology shocks is inconsistent with a two-sector model with permanent markup change, consumption-specific technology, or sector-specific factor shares. This paper proposes a new approach by finding the model's long-run properties that link labor productivity and the relative price of investment to sector-specific technology change and nontechnology change and by developing a new Max Share identification strategy to exploit these properties. The identified shocks play a large role in both short- and long-run economic fluctuations. This paper also highlights the implications of a broadly overlooked identity between TFP and aggregate sectoral technology.

Keywords: investment-specific technology; total factor productivity; labor productivity; relative price of investment; structural vector autoregression; Max Share

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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