Firm-Specific Capital, Productivity Shocks and Investment Dynamics
30 Pages Posted: 1 Apr 2009
Date Written: April 1, 2009
The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We first show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is firm-specific and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that permanent productivity improvements have short-term contractionary effects on investment. Even if this result emerges in both the firm-specific and rental capital specifications, only with the former the estimated average price duration is in line with microeconometric evidence. In the firm-specific capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which firms change their prices.
Keywords: firm-specific capital, NK-DSGE model, technology shocks, investment dynamics, Bayesian inference
JEL Classification: E32, E22, C11
Suggested Citation: Suggested Citation