What happens when the technology growth trend changes? Transition dynamics, capital growth, and the "new economy"

This paper considers transition dynamics associated with a change in the rate of technological progress, using a general equilibrium framework that incorporates stochastic technology growth trends. The model suggests that these dynamics are associated with protracted transition periods, especially when technology growth is capital-embodied. Simulations of the post-WWII U.S. economy show that the model's propagation mechanism is capable of explaining a significant portion of variation in observed growth rates, particularly for investment, capital accumulation, and employment. The simulations suggest that positive shocks to the trend rate of technology growth in the mid-1980s and early 1990s were precursors to the productivity acceleration of the late 1990s. (C) 2002 Elsevier Science (USA).