Stock Market and Investment Goods Prices: Implications for Macroeconomics

Lawrence Christiano () and Jonas Fisher ()

No 10031, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Stock market prices, a measure of the marginal cost of installed capital, are procyclical. Yet, prices of investment goods, the main input into new installed capital, are countercyclical. We exploit this information to identify the driving forces of the business cycle and the nature of capital installation costs. In our model installation costs are increasing in the growth of investment, and the business cycle is driven by permanent investment-specific technology shocks and transitory neutral technology shocks. When calibrated to the capital price observations, the model does well at accounting for the main features of asset returns and the business cycle of macroeconomic aggregates. In addition, unlike most other models, our's accounts for sectoral comovement in both output and factor inputs.

JEL-codes: E10 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin and nep-mac
Date: 2003-10
Note: EFG
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