Investment shocks and business cycles

Alejandro Justiniano, Giorgio Primiceri and Andrea Tambalotti

No 322, Staff Reports from Federal Reserve Bank of New York

Abstract: Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. We reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model.

Keywords: Business cycles; Labor supply; Capital investments; Stochastic analysis; Equilibrium (Economics); Competition (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
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Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Investment shocks and business cycles (2010)
Working Paper: Investment Shocks and Business Cycles (2009)
Working Paper: Investment Shocks and Business Cycles (2008)
Working Paper: Investment shocks and business cycles (2008)
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