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Firm-Specific Capital, Productivity Shocks and Investment Dynamics

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Author Info
Francesco Giuli
Massimiliano Tancioni
Abstract

The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We first show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is firm-specific and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary effects on investment. Even if this result emerges in both the firm-specific and rental capital specifications, only with the former the estimated average price duration is in line with microeconometric evidence. In the firm-specific capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which firms change their prices.

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Paper provided by Sapienza University of Rome, Department of Public Economics in its series Working Papers with number 120.

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Length: 30
Date of creation: May 2009
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Handle: RePEc:sap:wpaper:120

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Related research
Keywords: firm-specific capital; NK-DSGE model; technology shocks; investment dynamics; Bayesian inference.;

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis

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