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Investment shocks and macroeconomic co-movement

  • Francesco Furlanetto

    ()

    (Norges Bank (Central Bank of Norway))

  • Gisle J. Natvik

    ()

    (Norges Bank (Central Bank of Norway))

  • Martin Seneca

    ()

    (Norges Bank (Central Bank of Norway))

Recent studies find that shocks to the marginal efficiency of investment are a main driver of business cycles. Yet, they struggle to explain why consumption co-moves with real variables such as investment and output, which is a typical feature of an empirically recognizable business cycle. In this paper we show that within a conventional business cycle model, rule-of-thumb consumption provides a straightforward explanation of macroeconomic co-movement after a shock to the marginal efficiency of investment.

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Paper provided by Norges Bank in its series Working Paper with number 2011/14.

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Length: 18 pages
Date of creation: 31 Aug 2011
Handle: RePEc:bno:worpap:2011_14
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