Global Effects of US “New Economy” Shocks: the Role of Capital-Skill Complementarity

Abstract

Long run technical change since the 1970s can be characterised alternatively as capital enhancement when capital and skill are complementary, or skill enhancement when capital and skill are substitutes. These characterisations are not equivalent in the short run, however, particularly in the capital-mobile late 1990s, because the implications of the shocks for the return to installed physical capital, and hence the global distribution of investment, depend on which of the two is chosen. The extent of this non-equivalence is demonstrated in this paper, which examines the short run effects of the acceleration of technology shocks in the US during the late 1990s. Two comparative static multi-product macroeconomic models are constructed around the alternative characterisations and technology shocks are introduced in the US alone. A US economic expansion and gains to US factor owners are common to both but the sectoral and distributional effects within the US economy differ substantially between them. The effects on other regions follow primarily from changes in the distribution of global investment and the associated changes in real exchange rates and hence they are also sensitive to the technology characterisation chosen.