Stock Market and Investment Goods Prices: Implications for Macroeconomics
Lawrence J. Christiano
Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
Jonas D. M. Fisher
Federal Reserve Bank of Chicago - Economic Research Department
NBER Working Paper No. w10031
Stock market prices, a measure of the marginal cost of installed capital, are procyclical. Yet, prices of investment goods, the main input into new installed capital, are countercyclical. We exploit this information to identify the driving forces of the business cycle and the nature of capital installation costs. In our model installation costs are increasing in the growth of investment, and the business cycle is driven by permanent investment-specific technology shocks and transitory neutral technology shocks. When calibrated to the capital price observations, the model does well at accounting for the main features of asset returns and the business cycle of macroeconomic aggregates. In addition, unlike most other models, our's accounts for sectoral comovement in both output and factor inputs.
Number of Pages in PDF File: 33
Date posted: October 14, 2003
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