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Investment-specific technology shocks and consumption

  • Fransesco Furlanetto
  • Martin Seneca

Modern business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that, generally, positive investment-specific technology shocks induce a negative consumption response. The objective of this paper is to investigate whether a positive consumption response 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 very general parameterisations of the model.

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Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp49.

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Date of creation: Jul 2010
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Handle: RePEc:ice:wpaper:wp49
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