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Investment-specific technology shocks and consumption

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  • Fransesco Furlanetto
  • Martin Seneca

Abstract

Modern business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that, generally, positive investment-specific technology shocks induce a negative consumption response. The objective of this paper is to investigate whether a positive consumption response to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for very general parameterisations of the model.

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Bibliographic Info

Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp49.

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Date of creation: Jul 2010
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Handle: RePEc:ice:wpaper:wp49

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  1. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
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  10. Galí, Jordi, 2010. "The Return of the Wage Phillips Curve," CEPR Discussion Papers 7700, C.E.P.R. Discussion Papers.
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  13. anonymous, 2008. "Monetary policy report to the Congress," Web Site 34, Board of Governors of the Federal Reserve System (U.S.).
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  1. The investment-consumption correlation
    by Economic Logician in Economic Logic on 2011-02-16 15:17:00
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