Investment Shocks and the Comovement Problem

Hashmat Khan () and John Tsoukalas

No 09-09, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specification we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.

Keywords: Investment shocks; comovement; estimated DSGE models (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-10-21, Revised 2010-08-09
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-ias and nep-mac
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Citations: View citations in EconPapers (7)

Published: Revised version in Journal of Economic Dynamics and Control, Vol. 35, No. 1 (January 2011), pp. 115–130

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Related works:
Journal Article: Investment shocks and the comovement problem (2011)
Working Paper: Investment shocks and the comovement problem (2010)
Working Paper: Investment Shocks and the Comovement Problem (2010)
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