Long Run Productivity Risk and Aggregate Investment

Jack Favilukis and Xiaoji Lin

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We study the implications of long-run risk type shocks--shocks to the growth rate of productivity--for aggregate investment in a DSGE model. Our model offers an alternative to microfrictions explanation of aggregate investment non-linearities, in particular the heteroscedasticity of investment rate. Additionally, consistent with the data, these shocks imply that investment rate is history dependent (rising through an expansion), investment rate growth is positively autocorrelated, and is positively correlated with output growth at various leads and lags. A standard model with shocks to the level of productivity either predicts the opposite or fails to quantitatively capture these features in the data.

JEL-codes: E22 E23 E44 (search for similar items in EconPapers)
Date: 2012-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (2)

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Journal Article: Long run productivity risk and aggregate investment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2012-14

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