Are technology shocks contractionary? A Bayesian VAR analysis with priors on impulses responses

This paper estimates the effects of technology shocks in Bayesian VAR models of the United States, Japan and West Germany, imposing restrictions on the sign of impulse responses. These restrictions are motivated with explicit priors on the parameters of a dynamic general equilibrium model encompassing both real and nominal rigidities. In all countries technology shocks lead to a persistent increase in labor productivity, real wage, consumption, investment and output; hours worked increase with a humped-shape pattern. A novel way to apply Bayesian estimation methods to DSGE models is then explored, in which the posterior distribution of impulse responses is used to update the prior on structural parameters. This shows that nominal rigidities, particularly in the form of wage stickiness, are important in explaining the effects of technology shocks