Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited$

This paper re-examines recent empirical evidence that positive technology shocks lead to short-run declines in hours. Building on Galı´’s [1999. Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations. American Economic Review 89, 249–271] work, which uses long-run restrictions to identify technology shocks, we analyze whether the identified shocks can be plausibly interpreted as technology shocks. We first examine the validity of the identification assumption in a DGE model with several possible sources of permanent shocks. We then empirically assess the plausibility of the shocks using a variety of tests. After finding that the shocks pass all of the tests, we present two examples of modified DGE models that match the facts. r 2005 Published by Elsevier B.V.