Essays on Productivity, Labor Allocations, and Intangible Capital

The first essay conducts robustness analysis on Gali's (1999) results. Following Gali's identification strategy, the model is extended to the sectoral level within the private sector. The paper also looks at the two important breaks, 1973 recession and 1984-beginning of the "great moderation". The private sector results suggest that non-technology shocks are the major cause of business cycle fluctuation rather than technology shocks. Sectoral data also produced this conclusion with the exception of one sector. Most of the results do not change for the pre- and post-recession and great moderation dates. This essay reinforces the notion that technology shocks play a limited role in the aggregate short-run fluctuations of business cycles. These results pose a challenge to modern real business cycle theory. The question does hours decline in response to a technology shock attracted a lot of research in the last decade. The second essay attempted to investigate the response to hours in a three-variable--productivity, hours and corporate profits-- model using vector- autoregressive with long-run and short-run restrictions. The model imposes three restric- tions: technology shocks affect productivity permanently, hour's shock and profit shocks do not affect productivity in the long-run and profit shocks do not affect hours contempora- neously. The results seemed to be more encouraging for real business cycle theory and are inconsistent with the conclusion that technology shocks play limited role in business cycle fluctuations. An important finding is that profits matter empirically since it changed the response to hours from a technology shock. By adding profits to the model, hours do not decline from a productivity shock. Though the initial impact is negative they recover in first quarter and they co-move with productivity.The response to hours shock is however consistent with Gali (1999). Hours worked increase in response to a shock to employment. Recent empirical research argued that intangible capital has been playing an important role in explaining productivity gains in the last two decades. In the third essay, intangible capital is introduced in an otherwise standard real business cycle model. Firms expend resources to create intangible capital which is an additional input in the production func- tion. Since firm's investment in intangible capital is pro-cyclical it produces positive profits despite being a competitive firm. The firm increases investment in intangible capital from both temporary and permanent productivity shock. It also plays a significant role in pro- ducing endogenous movement in productivity. Firms use more labor and physical capital to produce intangible capital since it raises productivity and future profits. However, there is a trade-off between current period profits and investment in intangible capital. Perma- nent technology shock results in higher factor share of labor and capital allocated to create intangible capital which decreases profits in the current period; however, higher investment in intangible capital would raise future profits.