Productivity Shocks, Learning, and Open Economy Dynamics

Jacques Miniane

No 2004/088, IMF Working Papers from International Monetary Fund

Abstract: I study the implications of productivity shocks in a model where agents observe the aggregate level of productivity but not its permanent and transitory components separately. The model's predictions under learning differ substantially from those under full information and are in line with several empirical findings: (i) the response of investment to a permanent shock is sluggish and peaks with delay; (ii) permanent shocks generate positive rather than negative savings on impact; and (iii) saving and investment are highly correlated despite the assumption of capital mobility. Unlike other standard explanations of the Feldstein-Horioka puzzle, learning induces high correlations irrespective of the assumed persistence of shocks.

Keywords: WP; present discounted value; open economy (search for similar items in EconPapers)
Pages: 28
Date: 2004-05-01
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Citations: View citations in EconPapers (3)

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