TECHNOLOGY SHOCKS AND ROBUST SIGN RESTRICTIONS IN A EURO AREA SVAR*

Abstract

We use a model‐based identification strategy to estimate the impact of technology shocks on hours worked and employment in the euro area. The sign restrictions applied in the vector autoregression (VAR) analysis are consistent with a large class of dynamic stochastic general equilibrium (DSGE) models and are robust to parameter uncertainty. The results are in line with the conventional Real Business Cycle (RBC) interpretation that hours worked rise as a result of a positive technology shock. By comparing the sign restrictions method to the long‐run restriction approach of Galí ( Quaterly Journal of Economics (1992) 709–38) , we show that the results do not depend on the stochastic specification of the hours worked series or the data sample but only on the identification scheme.