A dual measure of correlation between the Solow residual and output growth

In this paper, we measure U.S. technology shocks by implementing a dual approach, which is based on price data instead of aggregate quantity data. By doing so, we find the relative volatility of technology shocks and the correlation between output fluctuation and technology shocks to be much smaller than those revealed in most real‐business‐cycle (RBC) studies. Our results support the findings of Burside et al. (1996), who showed that the correlation between technology shocks and output is exaggerated in the RBC literature. This suggests that one should examine other sources of fluctuations for a better understanding of the business cycle phenomena.