Economic fluctuations in the US and Euro area. Quantifying the contribution of technical change

This paper aims at quantifying the contribution of technical change to cyclical fluctuations in the US and Euro Area. We distinguish technical progress in labor-augmenting and capital-augmenting change. To this end, we derive and estimate a New Keynesian DSGE model embodying a constant elasticity of substitution (CES) production function for both areas. Our main findings are: i) capital-augmenting progress is the main source of technical change volatility; ii) labor-augmenting shocks give a negligible contribution to the variance of output; iii) technical change (of both types) explains more economic fluctuations in the US than in the euro area; iv) historical decomposition of GDP growth over our sample period (1980-2008) shows that capital-augmenting progress is one of the key drivers of the business cycle.