Productivity shocks, investment, and the real interest rate
AbstractI analyze the effects of a favorable shift in expected future productivity on the current level of investment and the real interest rate. In a standard RBC model, an increase in expected future productivity raises the real rate, but decreases the current level of investment for plausible parameter values of the intertemporal elasticity of substitution in consumption. However, it is shown that such a conclusion is unwarranted when nominal rigidities are introduced into the analysis. In contrast with the flexible-price case, the favorable shift in future productivity can lead to an increase in current investment, while at the same time driving up significantly the real rate of interest. The model with nominal rigidities lends theoretical support to the view expressed by some authors (e.g., Blanchard and Summers (1984), and Barro and Sala-i-Martin (1990), that the surge in investment and the real rate of across industrialized countries in 1983-84 was caused y a favorable shift in expected future profitability.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Boston in its series Working Papers with number 99-2.
Date of creation: 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-06-08 (All new papers)
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- Ardagna, Silvia & Alesina, Alberto & Perotti, Roberto & Schiantarelli, Fabio, 2002.
"Fiscal Policy, Profits, and Investment,"
3353756, Harvard University Department of Economics.
- Alesina, Alberto F & Ardagna, Silvia & Perotti, Roberto & Schiantarelli, Fabio, 1999. "Fiscal Policy, Profits and Investment," CEPR Discussion Papers 2250, C.E.P.R. Discussion Papers.
- Schiantarelli, Fabio & Perotti, Roberto & Ardagna, Silvia & Alesina, Alberto, 2002. "Fiscal Policy, Profits, and Investment," Scholarly Articles 4685103, Harvard University Department of Economics.
- Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2000. "Fiscal Policy, Profits, and Investment," Boston College Working Papers in Economics 504, Boston College Department of Economics.
- Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 1999. "Fiscal Policy, Profits, and Investment," NBER Working Papers 7207, National Bureau of Economic Research, Inc.
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