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Long Run Productivity Risk and Aggregate Investment

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  • Favilukis, Jack

    (London School of Economics and Political Science)

  • Lin, Xiaoji

    (OH State University)

Abstract

We study the implications of long-run risk type shocks--shocks to the growth rate of productivity--for aggregate investment in a DSGE model. Our model offers an alternative to microfrictions explanation of aggregate investment non-linearities, in particular the heteroscedasticity of investment rate. Additionally, consistent with the data, these shocks imply that investment rate is history dependent (rising through an expansion), investment rate growth is positively autocorrelated, and is positively correlated with output growth at various leads and lags. A standard model with shocks to the level of productivity either predicts the opposite or fails to quantitatively capture these features in the data.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2012-14.

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Date of creation: Jul 2012
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Handle: RePEc:ecl:ohidic:2012-14

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