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Investment-Specific Technology Shocks and International Business Cycles: An Empirical Assessment

Federal Reserve Bank of Atlanta Working Paper Series No. 2010-3

50 Pages Posted: 2 Mar 2010  

Federico Mandelman

Federal Reserve Bank of Atlanta

Pau Rabanal

International Monetary Fund

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Diego Vilán

University of Southern California - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2010

Abstract

In this paper, we first introduce investment-specific technology (IST) shocks into an otherwise standard international real business cycle model and show that a thoughtful calibration of them along the lines of Raffo (2009) successfully addresses several of the existing puzzles in the literature. In particular, we obtain a negative correlation of relative consumption and the terms of trade (Backus-Smith puzzle), as well as a more volatile real exchange rate, and cross-country output correlations that are higher than consumption correlations (price and quantity puzzles). Then we use data from the Organisation for Economic Co-operation and Development for the relative price of investment to build and estimate these IST processes across the United States and a "rest of the world" aggregate, showing that they are cointegrated and well represented by a vector error–correction model. Finally, we demonstrate that, when we fit such estimated IST processes into the model, the shocks are actually powerless to explain any of the existing puzzles.

Keywords: international business cycles, cointegration, investment-specific technology shocks

JEL Classification: E32, F32, F33, F41

Suggested Citation

Mandelman, Federico and Rabanal, Pau and Rubio-Ramirez, Juan Francisco and Vilán, Diego, Investment-Specific Technology Shocks and International Business Cycles: An Empirical Assessment (February 2010). Federal Reserve Bank of Atlanta Working Paper Series No. 2010-3. Available at SSRN: https://ssrn.com/abstract=1559305 or http://dx.doi.org/10.2139/ssrn.1559305

Federico Mandelman (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Pau Rabanal

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8057 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.econ.umn.edu/~rubio

Diego Vilán

University of Southern California - Department of Economics ( email )

3620 South Vermont Avenue
Kaprielian Hall 300
Los Angeles, CA CA 90089
United States

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