Finance and Economics Discussion Series (FEDS)
February 2016
Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model
Luca Guerrieri, Dale Henderson, and Jinill Kim
Abstract:
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
DOI: http://dx.doi.org/10.17016/FEDS.2016.007
PDF: Full Paper