The effect of monetary policy on residential and structures investment under differential project planning and completion times

Rochelle Edge ()

No 671, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes an empirical puzzle regarding the effect of monetary policy on fixed investment, specifically, why residential investment exhibits a strong and rapid response to changes in monetary policy while structures investment manifests a substantially weaker response. The paper proposes an explanation for these contrasting responses that is based on the differential planning and completion times of these two categories of investment as well as inflexibilities in changing the planned pattern of investment spending once the project has begun. Empirical support for the explanation is established by contrasting the responses of U.S. residential and structures building project starts and work undertaken to a monetary policy shock. The paper then shows that a calibrated sticky-price monetary business cycle model with multistage investment projects is capable of generating responses to monetary policy that are broadly consistent with those observed empirically.

Keywords: Monetary policy; Investments (search for similar items in EconPapers)
Date: 2000
New Economics Papers: this item is included in nep-dge and nep-mon
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Citations: View citations in EconPapers (28)

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