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A Flexible Finite-Horizon Identification of Technology Shocks
Recent empirical studies using in finite horizon long-run restrictions question the validity of the technology-driven real business cycle hypothesis. These results have met with their own controversy, stemming from their sensitivity to changes in model specification and the general poor performance of long-run restrictions in Monte Carlo experiments. We propose an alternative identification that maximizes the contribution of technology shocks to the forecast-error variance of labor productivity at a long, but finite horizon. In small samples, our identification outperforms its in finite ...