Event Details

Economics Research Seminar

Abstract: We estimate a novel empirical state-space model to examine the effects of international and domestic technology trend shocks on small open economies. The framework jointly identifies anticipated and unanticipated innovations in total factor productivity (TFP) and investment-specific technology (IST), both at the domestic and international level. Identification relies on long-run restrictions motivated by a standard two-country structural model. Our results reveal large and persistent productivity fluctuations. International non-stationary TFP and IST shocks account for approximately 30% and 24% of the variance of UK GDP, respectively, while UK-specific TFP and IST shocks are somewhat less influential. Crucially, it is the anticipated components of these shocks rather than the unanticipated ones that drive the bulk of macroeconomic volatility. We also trace the historical drivers of UK labor productivity growth, highlighting that the post-financial crisis slowdown can largely be attributed to a decline in the contribution of international IST shocks, alongside weak domestic TFP growth. Moreover, we demonstrate that standard two-country models impose restrictions on the relative price of investment that are inconsistent with our empirical findings. A two-sector model, incorporating investment adjustment costs and costly sectoral labor reallocation, is shown to successfully capture the observed empirical dynamics.