Investment Shocks

Benjamin Caswell

No 335109180, Working Papers from Lancaster University Management School, Economics Department

Abstract: Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBC framework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.

Keywords: comovement problem; investment shocks; labour wedge; business cycles (search for similar items in EconPapers)
JEL-codes: E27 E32 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-isf and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:335109180

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