Uncertain Technological Change PRELIMINARY AND INCOMPLETE

We develop a general equilibrium dynamic stochastic business cycle model augmented with uncertain total factor productivity shocks and investment specific technology shocks. Agents only observe noisy signals of these shocks, such as realized GDP, and update their beliefs each period about the fundamentals of the economy. We interpret this inability to perfectly observe the fundamentals of the economy as capturing informational frictions, and refer to agents’beliefs about the fundamentals as "sentiment." We estimate the model to match some important moments of the US economy and obtain direct measures of the characteristics of the unobserved technology shocks. We find that the impact of productivity shocks is generally similar to an environment without this form of uncertainty. However, a non-persistent "sentiment shock" (an erroneous signal) regarding the investment specific technology alters agents’behavior persistently, even though the underlying fundamentals governing the economy remain unchanged.