Are Technology Shocks More Expansionary at the ZLB?

What is it about?

A new Keynesian model with sticky prices predicts that a positive technology shock should be less expansionary or even contractionary when the zero lower bound (ZLB) is binding, as lower interest rates are unable to stimulate private spending in this situation. However, empirical research, such as the study conducted by Garín et al. (2019), has challenged this theory, finding that a positive technology shock is actually more expansionary at the ZLB. One potential explanation for this apparent inconsistency is the presence of high wage stickiness, which refers to the tendency for wages to fall less than prices in response to a shock. When this occurs, real wages increase, leading to an expectation of higher inflation and a decrease in the real interest rate at the ZLB. This stimulates private spending and expands output, as consumers and firms have more disposable income and can afford to increase their spending. To further understand this issue, I examined a new Keynesian model with sticky prices and wages. I found that the real-wage channel requires wages to be stickier than prices and the technology shock to be of moderate persistence in order to be effective. Persistent technology shocks can also be expansionary if the ZLB lasts for an extended period or if wages are even stickier. I also extended Garín et al.'s empirical model to include real wages and found that a positive technology shock leads to a rise in real wages at or away from the ZLB, supporting the idea that wage stickiness plays a role in determining the expansionary or contractionary effects of a technology shock. Without wage stickiness, real wages would always fall in the new Keynesian model. My findings are thus supported by micro-data and the extended model of Garín et al. Overall, my research suggests that the new Keynesian model with sticky prices and wages may be able to reconcile the apparent inconsistency between theory and empirical data when it comes to the effects of a positive technology shock at the ZLB. This highlights the importance of considering wage stickiness and the persistence of the shock in analyzing the effects of technological change on the economy. It also suggests that policies aimed at increasing wage stickiness, such as minimum wage laws or collective bargaining agreements, may be effective in mitigating the contractionary effects of the ZLB and promoting economic expansion.

Featured Image

Photo by Zwaddi on Unsplash

Photo by Zwaddi on Unsplash