Diego Comin, Mark Gertler and Ana Maria Santacreu, 2009
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 funda-
mentals of the evolution of the technology frontier. An important feature of
the model is that the process of moving to the frontier involves costly technol-
ogy adoption. In this way, news of improved growth potential has a positive
effect on current hours. As we show, the model also has reasonable implica-
tions 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.
Keywords: Business Cycles, Endogenous Technology Adoption, News Shocks,
Stock Market. JEL Classification: E3, O3.
