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Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model

  • Parantap Basu


  • Christoph Thoenissen


Is the relative price of investment goods a good proxy for investment frictions? We analyze investment frictions in an open economy, flexible price, two-country model and show that when the relative price of investment goods is endogenously determined in such a model, the relative price of investment can actually rise in response to a reduction in investment frictions. Only when the model is driven by TFP shocks do we observe a data congruent negative correlation between investment and the relative price of investment goods.

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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200704.

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Date of creation: 15 Jan 2007
Date of revision: 15 Aug 2007
Handle: RePEc:san:cdmawp:0704
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  9. Ejarque, Joao, 1999. "Variable capital utilization and investment shocks," Economics Letters, Elsevier, vol. 65(2), pages 199-203, November.
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