Contractionary effects of supply shocks: evidence and theoretical interpretation

The debate on the response of hours worked after productivity improvements is still an open issue in the theoretical and empirical literature. In this work we show that, once conditional correlations are taken into account, both hours and investment decline temporarily following a positive technology shock. We first provide evidence about this apparent puzzle employing weakly identi…ed SVECs. We then set-up and estimate a sticky price/wage DSGE model in which the presence of strategic complementarity in price setting lowers the slope of the New Keynesian Phillips curve, and show that the posterior impulse responses are consistent with the SVEC-based evidence.