Investment Shocks: Sources of Fluctuations in Small Open Economy

Emmanuel Akande

MPRA Paper from University Library of Munich, Germany

Abstract: This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Keywords: Real Business Cycle; Marginal Efficiency of Investment; productivity shocks; adjustment cost. (search for similar items in EconPapers)
JEL-codes: E32 E37 F4 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-upt
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Published in Economic and Business Review 3.15(2013): pp. 213-232

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:52159

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