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Investment-Specific Shocks, Business Cycles, and Asset Prices

Giuliano Curatola (), Michael Donadelli, Patrick Grüning and Christoph Meinerding
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Giuliano Curatola: Goethe University Frankfurt

No 36, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper proposes and tests a new source of time variation in real investment opportunities, namely long-run shocks to the productivity of the investment sector, to explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable return volatility differential between the investment and consumption sector. Moreover, positive long-run investment shocks are associated with low marginal utility and thus command a positive risk premium. We test our model using data on sectoral TFP and find evidence in support of our theoretical predictions.

Keywords: General Equilibrium Asset Pricing; Production Economy; Long-Run Risk; Investment-Specific Shocks; Wage Rigidities. (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
Date: 2016-11-30
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