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International business cycles and the relative price of investment goods

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  • Parantap Basu
  • Christoph Thoenissen

Abstract

Is the relative price of investment goods a good proxy for investment specific technology? 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. We show that the one-to-one correspondence between the IST shock 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 economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.

Suggested Citation

  • 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.
    • Handle: RePEc:cje:issued:v:44:y:2011:i:2:p:580-606
    DOI: 10.1111/j.1540-5982.2011.01645.x
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    Cited by:

    1. Gunes Kamber & Christoph Thoenissen, 2011. "Financial intermediation and the internationalbusiness cycle: The case of small countries with big banks," CAMA Working Papers 2011-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Aydan Dogan, 2019. "Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 202-220, October.
    3. Nadav Ben Zeev & Hashmat Khan, 2015. "Investment‐Specific News Shocks and U.S. Business Cycles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1443-1464, October.
    4. Dey, Jaya, 2013. "The role of investment-specific technology shocks in driving international business cycles: a bayesian approach," MPRA Paper 57803, University Library of Munich, Germany, revised 06 Aug 2014.
    5. Jacob, Punnoose & Peersman, Gert, 2013. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Journal of International Economics, Elsevier, vol. 90(2), pages 302-315.
    6. Dey, Jaya, 2017. "The Role Of Investment-Specific Technology Shocks In Driving International Business Cycles: A Bayesian Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 21(3), pages 555-598, April.
    7. Parantap Basu & Shesadri Banerjee, 2015. "Effect of Quantitative Easing on the Indian Economy: A Dynamic Stochastic General Equilibrium Perspective," CEMAP Working Papers 2015_03, Durham University Business School.
    8. Parantap Basu & Shesadri Banerjee, 2015. "Role of IST and TFP Shocks in Business Cycle Fluctuations: The Case of India," CEMAP Working Papers 2015_04, Durham University Business School.
    9. Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; 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

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