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Investment-specific technology shocks and consumption

  • Francesco Furlanetto

    ()

    (Norges Bank (Central Bank of Norway))

  • Martin Seneca

    (Norges Bank (Central Bank of Norway))

Current business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that a positive investment-specific technology shock generally induces a negative consumption response. The objective of this paper is to investigate whether positive consumption responses to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for general parameterisations of the model.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2010/WP-201030/
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Paper provided by Norges Bank in its series Working Paper with number 2010/30.

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Length: 46 pages
Date of creation: 29 Dec 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_30
Note: First version:
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