Revisiting the effect of a technology shock on hours

- Develop a flexible price RBC model of hyperbolic discounting.
- Show that hours fall following a technology shock.
- Show that dynamic responses of key macroeconomic aggregates are similar to those corroborated by previous studies.
- Naive belief plays a crucial role in generating the results.

A number of studies demonstrate that a positive technology shock leads to a short-run decline in hours (employment). This paper shows that a standard flexible price model can deliver the negative response of hours to the technology shock when hyperbolic discounting is incorporated into the model. This paper also finds that the model can produce similar dynamic responses of key macroeconomic aggregates to those corroborated by previous empirical studies.