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Marginal Efficiency of Investment (MEI) Shock and Comovement of Consumption (in Korean)

Author

Listed:
  • Kwang Hwan Kim

    (School of Economics, Yonsei University)

  • Chang-kee Lee

    (The Bank of Korea & Ph.D Candidate, School of Economics, Yonsei University)

Abstract

This paper seeks to resolve the consumption comovement problem in DSGE models: Consumption falls after a positive marginal efficiency of investment (MEI) shock, whereas other major economic variables such as GDP, investment, and labor rise. We perform a Bayesian estimation of the standard medium-scale DSGE model augmented with Jaimovich and Rebelo (2009) utility function and habit formation using U.S. and Korean data. We find that nonseparability between consumption and labor in the utility function is an essential element to resolve the comovement problem in both U.S. and Korean economy. The strength of habit formation in turn affects the ability of different specifications of introducing variable capital utilization to resolve the comovement problem. Finally, MEI shock is a most important driver of Korean business cycles as it is in U.S. economy.

Suggested Citation

  • Kwang Hwan Kim & Chang-kee Lee, 2016. "Marginal Efficiency of Investment (MEI) Shock and Comovement of Consumption (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 22(4), pages 1-37, December.
    • Handle: RePEc:bok:journl:v:22:y:2016:i:4:p:1-37
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    More about this item

    Keywords

    Marginal efficiency of investment (MEI) shock; Nonseparability; Capital utilization; Consumption habit; Comovement of consumption;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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