DP7598 Investment Shocks and the Relative Price of Investment

Author(s): Alejandro Justiniano , Giorgio E Primiceri , Andrea Tambalotti

Publication Date: December 2009

Keyword(s): Business cycles , DSGE model , financial factors , investment-specific technology

JEL(s): C11 , E22 , E30

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7598.asp.asp

We estimate a New-Neoclassical Synthesis business cycle model with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into the future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the post-war period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that it correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.