Finance and Economics Discussion Series (FEDS)
Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model
Luca Guerrieri, Dale Henderson, and Jinill Kim
Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one-sector models or on models with two or more sectors that can be aggregated. However, the same interpretation continues to go through in models that cannot be aggregated into a standard one-sector model. Furthermore, such a two-sector model with distinct factor input shares across production sectors and commingling of sectoral outputs in the assembly of final consumption and investment goods, in line with the U.S. Input-Output Tables, has implications for aggregate variables. It yields a closer match to the empirical evidence of positive comovement for consumption and investment.
Keywords: DSGE Models, Long-Run Restrictions, Multi-Sector Models, Vector Auto-Regressions
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