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Investment-specific technology shocks and international business cycles: an empirical assessment

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Listed:
  • Federico S. Mandelman
  • Pau Rabanal
  • Juan F. Rubio-Ramírez
  • Diego Vilán

Abstract

In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error–correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles.

Suggested Citation

  • Federico S. Mandelman & Pau Rabanal & Juan F. Rubio-Ramírez & Diego Vilán, 2010. "Investment-specific technology shocks and international business cycles: an empirical assessment," FRB Atlanta Working Paper 2010-03, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2010-03
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    References listed on IDEAS

    as
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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