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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

    ()

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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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200704.

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Date of creation: 15 Jan 2007
Date of revision: 15 Aug 2007
Handle: RePEc:san:cdmawp:0704

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Keywords: Investment frictions; investment specific technological progress; total factor productivity; relative price of investment goods terms of trade.;

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Cited by:
  1. Thoenissen, Christoph, 2011. "Exchange Rate Dynamics, Asset Market Structure, And The Role Of The Trade Elasticity," Macroeconomic Dynamics, Cambridge University Press, vol. 15(01), pages 119-143, February.

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