Marginal Efficiency of Investment (MEI) Shock and Comovement of Consumption (in Korean)

Kwang Hwan Kim () and Chang-kee Lee ()
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Kwang Hwan Kim: School of Economics, Yonsei University
Chang-kee Lee: The Bank of Korea & Ph.D Candidate, School of Economics, Yonsei University

Economic Analysis (Quarterly), 2016, vol. 22, issue 4, 1-37

Abstract: This paper seeks to resolve the consumption comovement problem in DSGE models: Consumption falls after a positive marginal efficiency of investment (MEI) shock, whereas other major economic variables such as GDP, investment, and labor rise. We perform a Bayesian estimation of the standard medium-scale DSGE model augmented with Jaimovich and Rebelo (2009) utility function and habit formation using U.S. and Korean data. We find that nonseparability between consumption and labor in the utility function is an essential element to resolve the comovement problem in both U.S. and Korean economy. The strength of habit formation in turn affects the ability of different specifications of introducing variable capital utilization to resolve the comovement problem. Finally, MEI shock is a most important driver of Korean business cycles as it is in U.S. economy.

Keywords: Marginal efficiency of investment (MEI) shock; Nonseparability; Capital utilization; Consumption habit; Comovement of consumption (search for similar items in EconPapers)
JEL-codes: E22 E32 E52 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:22:y:2016:i:4:p:1-37

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