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Investment-specific technology shocks and international business cycles: an empirical assessment

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  • Federico S. Mandelman
  • Pau Rabanal
  • Juan F. Rubio-Ramírez
  • Diego Vilán

Abstract

In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error–correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2010-03.

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Date of creation: 2010
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Handle: RePEc:fip:fedawp:2010-03

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  1. Investment-specific technology shocks and international business cycles: an empirical assessment
    by Christian Zimmermann in NEP-DGE blog on 2010-04-12 03:38:48
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