Business Cycles, Investment Shocks, and the "Barro-King Curse"

Guido Ascari, Louis Phaneuf and Eric Sims ()

No 815, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Recent empirical evidence identfi es investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profi les of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary eff ect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model - namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specifi c technologies - can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the eff ects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

Keywords: Investment shocks; Business cycle comovements; Standard household preferences; Monopolistic competition; Wage and price contracting; Intermediate inputs; Trend output growth; Trend inflation (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2016-12-14
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Citations: View citations in EconPapers (4)

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Working Paper: Business Cycles, Investment Shocks, and the "Barro-King" Curse (2016)
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