International business cycles and the relative price of investment goods
AbstractIs the relative price of investment goods a good proxy for investment frictions? We model this relative price in a flexible price international economy with two fundamental shocks, namely the total factor productivity (TFP) shock and the investment specific technology (IST) shock. The paper argues that the one-to-one correspondence between investment friction and the relative price of investment goods breaks down in an international economy because of the short run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST) as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of econ mies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment. A regression experiment with major OECD countries provided empirical support of the fact that terms of trade effect on the relative price of investment is important
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 0905.
Date of creation: Sep 2009
Date of revision:
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More information through EDIRC
Investment frictions; investment specific technological progress; total factor productivity; relative price of investment goods terms of trade;
Other versions of this item:
- Parantap Basu & Christoph Thoenissen, 2011. "International business cycles and the relative price of investment goods," Canadian Journal of Economics, Canadian Economics Association, vol. 44(2), pages 580-606, May.
- 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-2009-08-22 (All new papers)
- NEP-BEC-2009-08-22 (Business Economics)
- NEP-DGE-2009-08-22 (Dynamic General Equilibrium)
- NEP-MAC-2009-08-22 (Macroeconomics)
- NEP-OPM-2009-08-22 (Open Economy Macroeconomic)
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