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Firm-Specific Capital, Productivity Shocks and Investment Dynamics

  • Francesco Giuli
  • Massimiliano Tancioni

The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We fi…rst show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is …rm-speci…c and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary e¤ects on investment. Even if this result emerges in both the …rm-speci…c and rental capital speci…cations, only with the former the estimated average price duration is in line with microeconometric evidence. In the …rm-speci…c capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which …rms change their prices.

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Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 120.

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Length: 33
Date of creation: May 2009
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Handle: RePEc:sap:wpaper:wp120
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