An Analysis of the effect of productivity changes on business cycle

m ABSTRACT Productivity plays crucial role in determining economic welfare of nations and societies. Most of economists assumes that there is a comovement between productivity and business cycle. For this reason, in this study it is firstly tried to explain broad overview of labor and total factor productivity concepts and also provide cyclical behavior of productivity, its determinants and its relationship with economic activity. In order to find out the relationship between productivity and business cycle, it is examined the hypothesis of Real Business Cycle (RBC) that assumes productivity shocks is the only basic source of economic fluctuations. In this study, the effects of technology shocks on business cycles are examined employing Cointegrated VAR (VECM) methodology. Econometric results seem to support that a shock to output is the dominant source of business cycle fluctuations.