Investment shocks and the relative price of investment

Alejandro Justiniano, Giorgio Primiceri and Andrea Tambalotti

No 411, Staff Reports from Federal Reserve Bank of New York

Abstract: We estimate a New-Neoclassical Synthesis model of the business cycle with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the postwar period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that the shock correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.

Keywords: Business cycles; Saving and investment; Recessions (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec and nep-mac
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