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Stock Market and Investment Goods Prices: Implications for Macroeconomics

  • Lawrence J. Christiano
  • Jonas D. M. Fisher

Stock market prices, a measure of the marginal cost of installed capital, are procyclical. Yet, prices of investment goods, the main input into new installed capital, are countercyclical. We exploit this information to identify the driving forces of the business cycle and the nature of capital installation costs. In our model installation costs are increasing in the growth of investment, and the business cycle is driven by permanent investment-specific technology shocks and transitory neutral technology shocks. When calibrated to the capital price observations, the model does well at accounting for the main features of asset returns and the business cycle of macroeconomic aggregates. In addition, unlike most other models, our's accounts for sectoral comovement in both output and factor inputs.

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File URL: http://www.nber.org/papers/w10031.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10031.

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Date of creation: Oct 2003
Date of revision:
Handle: RePEc:nbr:nberwo:10031
Note: EFG
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  1. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  2. Austan Goolsbee, 1997. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," NBER Working Papers 6192, National Bureau of Economic Research, Inc.
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