Ricerc@Sapienza

This paper adds to the large body of literature on the effects of technology shocks
empirically and theoretically. Using a structural vector error correction model, we first
provide evidence that not only hours but also investment decline temporarily following a
technology improvement. This result is robust to important data and identification issues
addressed in the literature. We then show that the negative response of inputs is consistent
with an estimated monetary model in which the presence of strategic complementarity in
price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal
costs, and monetary policy does not fully accommodate the shock.