Technology Shocks

Definition: Technology shocks are events, in a macro model, that change the production function. Commonly this is modeled with a aggregate production function that has a scaling factor, e.g.:

F(K_t,N_t) = A_tK^aN^(1-a)

where A_t a time series of technology shocks whose values can be estimated or whose stochastic process (joint distribution) might be conjectured to have certain properties.

By this definition the oil shocks of the 1970s were technology shocks -- that is, for any given aggregate capital stock or labor stock, production was more expensive after an oil shock because energy would be more expensive. This interpretation explains why real business cycle theory drew interest in economics in the 1970s after the oil shocks had such a dramatic impact on Western economies.

(Econterms)

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