Learning-by-doing and aggregate fluctuations

An unresolved issue in business cycle theory is the endogenous propagation of shocks yielding allocations that exhibit the persistence displayed in the data. This paper explores the quantitative implications of one propagation mechanism: learning-by-doing, whose parameters are estimated using sectoral and plant level observations in the U.S. which are then integrated into a stochastic growth model with technology shocks. We conclude that learning-by-doing can be a powerful mechanism for generating endogenous persistence. Moreover learning-by-doing implies that the employment decision of the representative agent is dynamic which allows a re-interpretation of “taste shocks” or “cyclical labor utilization” as endogenous labor supply shifts.