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Investment Shocks and Business Cycles

  • Alejandro Justiniano
  • Giorgio E. Primiceri
  • Andrea Tambalotti

We study the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies, but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15570.

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Date of creation: Dec 2009
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:15570
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