Long Run Productivity Risk and Aggregate Investment

Fisher College of Business Working Paper No. 2012-03-014

Charles A. Dice Center Working Paper No. 2012-14

63 Pages Posted: 3 Aug 2012 Last revised: 27 Mar 2013

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Xiaoji Lin

University of Minnesota

Date Written: March 26, 2012

Abstract

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

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. Available at SSRN: https://ssrn.com/abstract=2122940 or http://dx.doi.org/10.2139/ssrn.2122940

Jack Y Favilukis (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Xiaoji Lin

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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