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Investment Shocks, Consumption Puzzle, And Business Cycles

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  • Yoonseok Choi

Abstract

A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. (JEL E3, E7)

Suggested Citation

  • Yoonseok Choi, 2020. "Investment Shocks, Consumption Puzzle, And Business Cycles," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1387-1400, July.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:3:p:1387-1400
    DOI: 10.1111/ecin.12856
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    References listed on IDEAS

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    Cited by:

    1. Liao, Shian-Yu & Chen, Been-Lon, 2023. "News shocks to investment-specific technology in business cycles," European Economic Review, Elsevier, vol. 152(C).
    2. Benjamin Caswell, 2021. "Investment Shocks," Working Papers 335109180, Lancaster University Management School, Economics Department.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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