February 2016

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.

Accessible materials (.zip)

Keywords: DSGE Models, Long-Run Restrictions, Multi-Sector Models, Vector Auto-Regressions

DOI: http://dx.doi.org/10.17016/FEDS.2016.007

PDF: Full Paper

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Last Update: June 19, 2020