Long Run Productivity Risk and Aggregate Investment
Charles A. Dice Center Working Paper No. 2012-14
63 Pages Posted: 3 Aug 2012 Last revised: 27 Mar 2013
Date Written: March 26, 2012
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.
Keywords: Nonlinearities, Investment, History Dependence, Heteroscedasticity
JEL Classification: E22, E23, E44
Suggested Citation: Suggested Citation