Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model

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Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model

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Parantap Basu ()
Christoph Thoenissen ()

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Christoph Thoenissen

Abstract

Is the relative price of investment goods a good proxy for investment frictions? We analyze investment frictions in an open economy, flexible price, two-country model and show that when the relative price of investment goods is endogenously determined in such a model, the relative price of investment can actually rise in response to a reduction in investment frictions. Only when the model is driven by TFP shocks do we observe a data congruent negative correlation between investment and the relative price of investment goods.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0704.

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Date of creation: Jan 2007
Date of revision: Aug 2007
Handle: RePEc:san:cdmawp:0704

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-01-28 (All new papers)
NEP-DGE-2007-01-28 (Dynamic General Equilibrium)
NEP-MAC-2007-01-28 (Macroeconomics)

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Other versions:
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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.)

Christoph Thoenissen, 2008. " Exchange rate dynamics, asset market structure and the role of the trade elasticity," CDMA Working Paper Series 0803, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]

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