Business Cycles with a Common Trend in Neutral and Investment-Specific Productivity

28 Pages Posted: 19 Jul 2010

See all articles by Stephanie Schmitt-Grohé

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2010

Abstract

This paper identifies a new source of business-cycle fluctuations. Namely, a common stochastic trend in neutral and investment-specific productivity. We document that in U.S. postwar quarterly data total factor productivity (TFP) and the relative price of investment are cointegrated. We show theoretically that TFP and the relative price of investment are cointegrated if and only if neutral and investment-specific productivity share a common stochastic trend. We econometrically estimate an RBC model augmented with a number of real rigidities and driven by a multitude of shocks. We find that in the context of our estimated model, innovations in the common stochastic trend explain a sizable fraction of the unconditional variances of output, consumption, investment, and hours.

Keywords: Common Trend, Investment Specific Technlogy Shocks, Maximum Likelihood Estimation of DSGE Model, Neutral Technology Shocks, Sources of Business Cycles

JEL Classification: E31

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, Business Cycles with a Common Trend in Neutral and Investment-Specific Productivity (June 2010). CEPR Discussion Paper No. DP7878, Available at SSRN: https://ssrn.com/abstract=1640400

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER)

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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