Durable Goods, Investment Shocks and the Comovement Problem

Been-Lon Chen and Shian-Yu Liao

No 17-A007, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: Recent research based on sticky-price models suggests that capital investment shocks are an important driver of business cycle fluctuations. Despite their quantitative importance in explaining business cycles, a comovement problem emerges because the shocks generate an intertemporal substitution effect away from consumption toward investment. This paper resolves the comovement problem by extending the standard neoclassical sticky-price model to a two-sector model with consumer durable services. When durable goods are used as investment in capital and consumer durables, positive capital investment shocks also generate an intratemporal substitution effect away from consumer durable services toward nondurable consumption that dominates the intertemporal effect. As a result, consumption increases, and the comovement problem is resolved.

Keywords: Investment shocks; Durables; Sticky prices; Comovement (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-05
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

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Journal Article: Durable Goods, Investment Shocks, and the Comovement Problem (2018)
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