Final published version, 1.3 MB, PDF document
Research output: Working paper
Research output: Working paper
}
TY - UNPB
T1 - Investment Shocks
T2 - the Labour Wedge and the Comovement Problem
AU - Caswell, Benjamin
PY - 2021/8/31
Y1 - 2021/8/31
N2 - Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBCframework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.
AB - Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBCframework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.
KW - comovement problem
KW - investment shocks
KW - labour wedge
KW - business cycles
M3 - Working paper
T3 - Economics Working Papers Series
BT - Investment Shocks
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -