Interpreting investment-specific technology shocks

Luca Guerrieri, Dale Henderson and Jinill Kim

No 1000, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Investment-specific technology (IST) shocks are often interpreted as multi-factor productivity (MFP) shocks in a separate investment-producing sector. However, this interpretation is strictly valid only when some stringent conditions are satisfied. Some of these conditions are at odds with the data. Using a two-sector model whose calibration is based on the U.S. Input-Output Tables, we consider the implications of relaxing several of these conditions. In particular, we show how the effects of IST shocks in a one-sector model differ from those of MFP shocks to an investment-producing sector of a two-sector model. Importantly, with a menu of shocks drawn from recent empirical studies, MFP shocks induce a positive short-run correlation between consumption and investment consistent with U.S. data, while IST shocks do not.

Keywords: Business cycles; Technology - Economic aspects (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec and nep-dge
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Citations: View citations in EconPapers (18)

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