Real Rigidities, Productivity Improvements and Investment Dynamics

Posted: 19 Dec 2012

See all articles by Francesco Giuli

Francesco Giuli

University of Rome III - Department of Economics

Massimiliano Tancioni

Sapienza University of Rome, Department of Public Economics

Date Written: April 18, 2012

Abstract

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

Suggested Citation

Giuli, Francesco and Tancioni, Massimiliano, Real Rigidities, Productivity Improvements and Investment Dynamics (April 18, 2012). Journal of Economic Dynamics and Control, Vol. 36, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2190820

Francesco Giuli (Contact Author)

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

Massimiliano Tancioni

Sapienza University of Rome, Department of Public Economics ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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