Long Run Productivity Risk and Aggregate Investment
University of British Columbia (UBC) - Division of Finance
Ohio State University (OSU) - Fisher College of Business
March 26, 2012
Fisher College of Business Working Paper No. 2012-03-014
Charles A. Dice Center Working Paper No. 2012-14
What are the implications of long-run productivity risk - shocks to the growth rate of productivity - for aggregate investment in a DSGE model? We offer an alternative to microfrictions explanation of aggregate investment non-linearities, in particular the heteroscedasticity of investment rate. Additionally, consistent with the data, these shocks imply that investment rate is history dependent (rising through expansions), its growth is positively autocorrelated, and it is positively correlated with output growth at various leads and lags. A standard model with shocks to the level of productivity either predicts opposite investment behavior or fails to quantitatively capture these features in the data.
Number of Pages in PDF File: 63
Keywords: Nonlinearities, Investment, History Dependence, Heteroscedasticity
JEL Classification: E22, E23, E44
Date posted: August 3, 2012 ; Last revised: March 27, 2013
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