Real Rigidities, Productivity Improvements and Investment Dynamics
Posted: 19 Dec 2012
Date Written: April 18, 2012
The theoretical literature on business cycles predicts a positive investment response to productivity improvements, a prediction we question from theoretical and empirical perspectives. We show that a short-term negative response of investment to a positive technology shock is consistent with a reasonably parameterized new Keynesian dynamic stochastic general equilibrium (DSGE) model in which firm-specific capital introduces an additional real rigidity, and monetary policy is not fully accommodative. Employing Bayesian techniques, we provide evidence that permanent productivity improvements have short-term, contractionary effects on investment. Although this result can be obtained from both firm-specific and rental capital models, only in the case of the former is the average price duration in line with the microeconometric evidence.
Keywords: firm-specific capital, NK-DSGE model, technology shocks, investment dynamics, Bayesian inference
JEL Classification: E32, E22, C11
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