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Uncertainty Shocks and the Relative Price of Investment Goods

Author

Listed:
  • Munechika Katayama

    (Waseda University)

  • Kwang Hwan Kim

    (Yonsei University)

Abstract

This study empirically shows that higher uncertainty leads to not only a simultaneous drop in consumption and investment, but also a rise in the relative price of investment goods. This negative relationship between the relative price and quantity of investment suggests that heightened uncertainty depresses investment as an adverse supply shock to the investment sector. We demonstrate that a two-sector sticky price model with realistic asymmetric sectoral price rigidity can successfully account for our empirical findings. In particular, the underlying mechanism behind the negative relationship between the price and quantity of investment is limited intersectoral factor mobility. By contrast, the standard two-sector model featuring perfect factor mobility causes a negative co-movement between consumption and investment, contradicting the business cycle phenomenon. (Copyright: Elsevier)

Suggested Citation

  • Munechika Katayama & Kwang Hwan Kim, 2018. "Uncertainty Shocks and the Relative Price of Investment Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 163-178, October.
  • Handle: RePEc:red:issued:17-76
    DOI: 10.1016/j.red.2018.05.003
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    More about this item

    Keywords

    Uncertainty shocks; Sticky prices; Factor mobility; Relative price of investment goods;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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