Long Run Productivity Risk and Aggregate Investment

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

Favilukis, Jack Y and Lin, Xiaoji, Long Run Productivity Risk and Aggregate Investment (March 26, 2012). Fisher College of Business Working Paper No. 2012-03-014, Charles A. Dice Center Working Paper No. 2012-14, Available at SSRN: https://ssrn.com/abstract=2122940 or http://dx.doi.org/10.2139/ssrn.2122940