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Investment Shocks

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  • Benjamin Caswell

Abstract

Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBC framework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.

Suggested Citation

  • Benjamin Caswell, 2021. "Investment Shocks," Working Papers 335109180, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:335109180
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2021_010.pdf
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    References listed on IDEAS

    as
    1. Been‐Lon Chen & Shian‐Yu Liao, 2018. "Durable Goods, Investment Shocks, and the Comovement Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 377-406, March.
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    12. Khan, Hashmat & Tsoukalas, John, 2011. "Investment shocks and the comovement problem," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 115-130, January.
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    More about this item

    Keywords

    comovement problem; investment shocks; labour wedge; business cycles;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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