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A real explanation for heterogeneous investment dynamics

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Jonas D.M. Fisher

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Abstract

Household investment, that is investment in consumer durables and housing, leads non-residential fixed investment over the U.S. business cycle. This observation represents a potent challenge to real business cycle (RBC) theory. First of all the theory has been unable to account for it. In addition, research suggests the observation is driven by monetary shocks, supporting the view that these shocks play a leading role in the U.S. business cycle. This paper shows that RBC theory is consistent with the investment dynamics after all. It does so by generalizing the standard home production environment to take into account the fact that household capital is useful in market production.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-01-14.

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Date of creation: 2001
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Handle: RePEc:fip:fedhwp:wp-01-14

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Keywords: Monetary theory ; Business cycles;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycle," RCER Working Papers 268, University of Rochester - Center for Economic Research (RCER).
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  2. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December. [Downloadable!] (restricted)
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  3. John Y. Campbell & Sydney Ludvigson, 2000. "Elasticities of Substitution in Real Business Cycle Models with Home Production," Harvard Institute of Economic Research Working Papers 1900, Harvard - Institute of Economic Research. [Downloadable!]
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  4. Hornstein, Andreas & Praschnik, Jack, 1997. "Intermediate inputs and sectoral comovement in the business cycle," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 573-595, December. [Downloadable!] (restricted)
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  5. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Paper 9312, Federal Reserve Bank of Cleveland. [Downloadable!]
  6. Lawrence J. Christiano & Robert J. Vigfusson, 2001. "Maximum likelihood in the frequency domain: the importance of time-to-plan," Working Paper 0106, Federal Reserve Bank of Cleveland. [Downloadable!]
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  7. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-55, February. [Downloadable!] (restricted)
  8. Einarsson, Tor & Marquis, Milton H., 1997. "Home production with endogenous growth," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 551-569, August. [Downloadable!] (restricted)
  9. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  10. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, vol. 21(2), pages 129-158, July. [Downloadable!] (restricted)
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  11. Rochelle M. Edge, 2000. "The effect of monetary policy on residential and structures investment under differential project planning and completion times," International Finance Discussion Papers 671, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Greenwood, J. & Rogerson, R. & Wright, R., 1993. "Household Production in Real Business Cycle Thoery," RCER Working Papers 347, University of Rochester - Center for Economic Research (RCER).
  13. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-90, May.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jeffrey R. Campbell & Zvi Hercowitz, 2004. "The role of households' collateralized debts in macroeconomic stabilization," Working Paper Series WP-04-24, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Edgar Cudmore & John Whalley, 2003. "Regeneration, Labour Supply and the Welfare Costs of Taxes," NBER Working Papers 10138, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jeffrey R. Campbell & Zvi Hercowitz, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," NBER Working Papers 11330, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  5. Michael A. Kouparitsas & Daisuke J. Nakajima, 2006. "Are U.S. and Seventh District business cycles alike?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 45-60. [Downloadable!]
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