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Investment Shocks and the Relative Price of Investment

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  • Justiniano, Alejandro
  • Primiceri, Giorgio E
  • Tambalotti, Andrea

Abstract

We estimate a New-Neoclassical Synthesis business cycle model with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into the future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the post-war period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that it correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.

Suggested Citation

  • Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2009. "Investment Shocks and the Relative Price of Investment," CEPR Discussion Papers 7598, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7598
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    References listed on IDEAS

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    More about this item

    Keywords

    Business cycles; DSGE model; financial factors; investment-specific technology;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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