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Business Cycles, Investment Shocks, and the "Barro-King" Curse

Listed author(s):
  • Guido Ascari
  • Louis Phaneuf
  • Eric Sims

Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model – namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies – can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22941.

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Date of creation: Dec 2016
Handle: RePEc:nbr:nberwo:22941
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  1. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
  2. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x, January.
  3. Ben S. Bernanke & Julio J. Rotemberg, 1997. "Editorial in "NBER Macroeconomics Annual 1997, Volume 12"," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 1-6 National Bureau of Economic Research, Inc.
  4. Louis Phaneuf & Eric R. Sims & Jean Gardy Victor, 2015. "Inflation, Output, and Markup Dynamics with Forward-Looking Wage and Price Setters," NBER Working Papers 21599, National Bureau of Economic Research, Inc.
  5. Liu, Zheng & Phaneuf, Louis, 2007. "Technology shocks and labor market dynamics: Some evidence and theory," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2534-2553, November.
  6. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1, November.
  7. Guido Ascari & Louis Phaneuf & Eric Sims, 2015. "On the Welfare and Cyclical Implications of Moderate Trend Inflation," NBER Working Papers 21392, National Bureau of Economic Research, Inc.
  8. Furlanetto, Francesco & Seneca, Martin, 2014. "Investment shocks and consumption," European Economic Review, Elsevier, vol. 66(C), pages 111-126.
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