Modeling Investment‐Sector Efficiency Shocks: When Does Disaggregation Matter?

27 Pages Posted: 30 Jul 2014

See all articles by Luca Guerrieri

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Dale W. Henderson

Federal Reserve Board

Jinill Kim

Korea University

Date Written: August 2014

Abstract

The most straightforward way to analyze investment‐sector productivity developments is to construct a two‐sector model with a sector‐specific productivity shock. An often used modeling shortcut accounts for such developments using a one‐sector model with shocks to the efficiency of investment in a capital accumulation equation. This shortcut is theoretically justified when some stringent conditions are satisfied. Using a two‐sector model, we consider the implications of relaxing several of the conditions that are at odds with the U.S. Input–Output Tables, including equal factor shares across sectors. The effects of productivity shocks to an investment‐producing sector of our two‐sector model differ from those of efficiency shocks to investment in a one‐sector model. Notably, expansionary productivity shocks boost consumption in every period, whereas expansionary efficiency shocks cause consumption to fall substantially for many periods.

Suggested Citation

Guerrieri, Luca and Henderson, Dale W. and Kim, Jinill, Modeling Investment‐Sector Efficiency Shocks: When Does Disaggregation Matter? (August 2014). International Economic Review, Vol. 55, Issue 3, pp. 891-917, 2014. Available at SSRN: https://ssrn.com/abstract=2473858 or http://dx.doi.org/10.1111/iere.12075

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Dale W. Henderson

Federal Reserve Board ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2343 (Phone)
202-736-5638 (Fax)

Jinill Kim

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701

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