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Do TFP and the relative price of investment share a common I(1) component?

Luca Benati ()

Journal of Economic Dynamics and Control, 2014, vol. 45, issue C, 239-261

Abstract: Results from cointegration tests clearly suggest that TFP and the relative price of investment (RPI) are not cointegrated. Evidence on the alternative possibility that they may nonetheless contain a common I(1) component generating long-horizon co-variation between them crucially depends on the fact that (i) structural breaks are, or are not allowed for, and (ii) the precise nature and timing of such breaks. Not allowing for breaks, evidence points towards the presence of a common component inducing positive long-horizon covariation, which is compatible with the notion that the technology transforming consumption goods into investment goods is non-linear, and the RPI is also impacted upon by neutral shocks. Allowing for breaks, evidence suggests that long-horizon covariation is either nil or negative.

Keywords: Technology shocks; Unit roots; Cointegration; Structural VARs (search for similar items in EconPapers)
JEL-codes: E30 E32 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jedc.2014.05.019

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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