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Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity

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  • Stephanie Schmitt-Grohe

    (Columbia University)

  • Martin Uribe

    (Columbia University)

Abstract

This paper identifies a new source of business-cycle fluctuations. Namely, a common stochastic trend in neutral and investment-specific productivity. We document that in U.S. postwar quarterly data total factor productivity (TFP) and the relative price of investment are cointegrated. We show theoretically that TFP and the relative price of investment are cointegrated if and only if neutral and investment-specific productivity share a common stochastic trend. We econometrically estimate an RBC model augmented with a number of real rigidities and driven by a multitude of shocks. We find that in the context of our estimated model, innovations in the common stochastic trend explain. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 1 (January)
Pages: 122-135

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Handle: RePEc:red:issued:09-246

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Keywords: Sources of business cycles; Investment specific shocks; Technology shocks; Cointegration; Common shocks;

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References

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  1. David Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2010. "Firm-specific capital, nominal rigidities and the business cycle," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 990, Board of Governors of the Federal Reserve System (U.S.).
  2. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2008. "Investment shocks and business cycles," Staff Reports, Federal Reserve Bank of New York 322, Federal Reserve Bank of New York.
  3. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(3), pages 413-451, June.
  4. Chernozhukov, Victor & Hong, Han, 2003. "An MCMC approach to classical estimation," Journal of Econometrics, Elsevier, Elsevier, vol. 115(2), pages 293-346, August.
  5. Paul Beaudry & Bernd Lucke, 2010. "Letting Different Views about Business Cycles Compete," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2009, Volume 24, pages 413-455 National Bureau of Economic Research, Inc.
  6. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 158, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 93-10, Federal Reserve Bank of San Francisco.
  8. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1998. "The Role of Investment-Specific Technological Change in the Business Cycle," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 449, University of Rochester - Center for Economic Research (RCER).
  9. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices, Review of Economic Dynamics 09-191, Review of Economic Dynamics.
  10. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 309-341.
  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
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Cited by:
  1. Ryan Chahrour & Stephanie Schmitt-Grohé & Martín Uribe, 2010. "A Model-Based Evaluation of the Debate on the Size of the Tax Multiplier," NBER Working Papers 16169, National Bureau of Economic Research, Inc.
  2. Marina Azzimonti & Matthew Talbert, 2011. "Partisan cycles and the consumption volatility puzzle," Working Papers 11-21, Federal Reserve Bank of Philadelphia.
  3. Pau Rabanal & Vicente Tuesta, 2013. "Nontradable Goods and the Real Exchange Rate," Open Economies Review, Springer, Springer, vol. 24(3), pages 495-535, July.
  4. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the United States and Europe," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2011, pages 169-235 National Bureau of Economic Research, Inc.
  5. Matthias Gubler & Matthias S. Hertweck, 2013. "Commodity Price Shocks and the Business Cycle: Structural Evidence for the U.S," Working Papers 2013-05, Swiss National Bank.
  6. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, Econometric Society, vol. 80(6), pages 2733-2764, November.
  7. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.
  8. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 273-289.
  9. Ko, Jun-Hyung & Miyazawa, Kensuke & Vu, Tuan Khai, 2012. "News shocks and Japanese macroeconomic fluctuations," Japan and the World Economy, Elsevier, Elsevier, vol. 24(4), pages 292-304.
  10. Benjamin Born & Alexandra Peter & Johannes Pfeifer, 2011. "Fiscal News and Macroeconomic Volatility," Bonn Econ Discussion Papers, University of Bonn, Germany bgse08_2011, University of Bonn, Germany.
  11. Fatma Pinar Erdem & Erdal Ozmen, 2014. "Exchange Rate Regimes and Business Cycles: An Empirical Investigation," ERC Working Papers, ERC - Economic Research Center, Middle East Technical University 1404, ERC - Economic Research Center, Middle East Technical University, revised Jun 2014.
  12. Mennuni, Alessandro, 2014. "The Role of Curvature in the Transformation Frontier between Consumption and Investment," Discussion Paper Series In Economics And Econometrics, Economics Division, School of Social Sciences, University of Southampton 1407, Economics Division, School of Social Sciences, University of Southampton.

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