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Firm-Specific Capital, Productivity Shocks and Investment Dynamics

Francesco Giuli () and Massimiliano Tancioni ()

No 120, Working Papers in Public Economics from University of Rome La Sapienza, Department of Economics and Law

Abstract: The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We fi…rst show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is …rm-speci…c and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary e¤ects on investment. Even if this result emerges in both the …rm-speci…c and rental capital speci…cations, only with the former the estimated average price duration is in line with microeconometric evidence. In the …rm-speci…c capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which …rms change their prices.

Keywords: Â…rm-speciÂ…c capital; NK-DSGE model; technology shocks; investment dynamics; Bayesian inference. (search for similar items in EconPapers)
JEL-codes: C11 E22 E32 (search for similar items in EconPapers)
Pages: 33
Date: 2009-05
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