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Investment-specific technology shocks and international business cycles: an empirical assessment

Federico Mandelman (), Pau Rabanal (), Juan F Rubio-Ramirez () and Diego Vilan

No 2010-03, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error?correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles.

Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-opm
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Related works:
Journal Article: Investment Specific Technology Shocks and International Business Cycles: An Empirical Assessment (2011) Downloads
Working Paper: Investment; Specific Technology Shocks and International Business Cycles: An Empirical Assessment (2010) Downloads
Working Paper: Investment-Specific Technology Shocks and International Business Cycles: An Empirical Assessment (2010) Downloads
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