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Investment Shocks: Sources of Fluctuations in Small Open Economy

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  • Akande, Emmanuel

Abstract

This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Suggested Citation

  • Akande, Emmanuel, 2013. "Investment Shocks: Sources of Fluctuations in Small Open Economy," MPRA Paper 52159, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52159
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Real Business Cycle; Marginal Efficiency of Investment; productivity shocks; adjustment cost.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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