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Investment-specific technology shocks and consumption

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  • Fransesco Furlanetto
  • Martin Seneca

Abstract

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.

Suggested Citation

  • Fransesco Furlanetto & Martin Seneca, 2010. "Investment-specific technology shocks and consumption," Economics wp49, Department of Economics, Central bank of Iceland.
    • Handle: RePEc:ice:wpaper:wp49
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The investment-consumption correlation
      by Economic Logician in Economic Logic on 2011-02-16 21:17:00

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    Cited by:

    1. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    2. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.
    3. Khan, Hashmat & Tsoukalas, John, 2011. "Investment shocks and the comovement problem," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 115-130, January.
    4. Gubler, Matthias & Hertweck, Matthias S., 2013. "Commodity price shocks and the business cycle: Structural evidence for the U.S," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 324-352.
    5. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    6. Jacob, Punnoose & Peersman, Gert, 2013. "Dissecting the dynamics of the US trade balance in an estimated equilibrium model," Journal of International Economics, Elsevier, vol. 90(2), pages 302-315.
    7. Furlanetto, Francesco & Seneca, Martin, 2014. "New Perspectives On Depreciation Shocks As A Source Of Business Cycle Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1209-1233, September.
    8. Andrea Ajello, 2016. "Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 106(8), pages 2256-2303, August.
    9. Crowley, Patrick M. & Hughes Hallett, Andrew, 2015. "Great moderation or “Will o’ the Wisp”? A time–frequency decomposition of GDP for the US and UK," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 82-97.
    10. Furlanetto, Francesco & Natvik, Gisle J. & Seneca, Martin, 2013. "Investment shocks and macroeconomic co-movement," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 208-216.
    11. Reza, Abeer, 2014. "Consumption response to investment shocks under financial frictions," Economics Letters, Elsevier, vol. 123(1), pages 50-53.
    12. Been‐Lon Chen & Shian‐Yu Liao, 2018. "Durable Goods, Investment Shocks, and the Comovement Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 377-406, March.
    13. Eusepi, Stefano & Preston, Bruce, 2015. "Consumption heterogeneity, employment dynamics and macroeconomic co-movement," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 13-32.
    14. Furlanetto, Francesco & Seneca, Martin, 2014. "Investment shocks and consumption," European Economic Review, Elsevier, vol. 66(C), pages 111-126.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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