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Are predictable improvements in TFP contractionary or expansionary? implications from sectoral TFP

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  • Deokwoo Nam
  • Jian Wang

Abstract

We document in the US data: (1) The dominant predictable component of investment-sector TFP is its long-run movements, and a favorable shock to predictable changes in investmentsector TFP induces a broad economic boom that leads actual increases in investment-sector TFP by almost two years, and (2) predictable changes in consumption-sector TFP occur mainly at short forecast horizons, and a favorable shock to such predictable changes leads to immediate reductions in hours worked, investment, and output as well as an immediate rise in consumption-sector TFP. We argue that these documented differences in the responses to shocks to predictable sectoral TFP changes can reconcile the seemingly contradictory findings in Beaudry and Portier (2006) and Barsky and Sims (2011), whose analyses are based on aggregate TFP measures. In addition, we find that shocks to predictable changes in investment-sector TFP account for 50% of business cycle fluctuations in consumption, hours, investment, and output, while shocks to predictable changes in consumption-sector TFP explain only a small fraction of business cycle fluctuations of these aggregate variables.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 114.

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Date of creation: 2012
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Handle: RePEc:fip:feddgw:114

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  1. Robert B. Barsky & Eric R. Sims, 2009. "News Shocks," NBER Working Papers 15312, National Bureau of Economic Research, Inc.
  2. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do mood swings drive business cycles and is it rational?," Globalization and Monetary Policy Institute Working Paper 98, Federal Reserve Bank of Dallas.
  3. Neville Francis & Michael T. Owyang & Jennifer E. Roush & Riccardo DiCecio, 2010. "A flexible finite-horizon alternative to long-run restrictions with an application to technology shock," Working Papers 2005-024, Federal Reserve Bank of St. Louis.
  4. André Kurmann & Christopher Otrok, 2010. "News Shocks and the Slope of the Term Structure of Interest Rates," Cahiers de recherche 1005, CIRPEE.
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Cited by:
  1. Christoph Görtz & John D. Tsoukalas, 2013. "News shocks and business cycles: bridging the gap from different methodologies," Working Papers 2013_25, Business School - Economics, University of Glasgow.

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