Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model

40 Pages Posted: 9 Feb 2016

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: 2016-02-08

Abstract

Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one-sector models or on models with two or more sectors that can be aggregated. However, the same interpretation continues to go through in models that cannot be aggregated into a standard one-sector model. Furthermore, such a two-sector model with distinct factor input shares across production sectors and commingling of sectoral outputs in the assembly of final consumption and investment goods, in line with the U.S. Input-Output Tables, has implications for aggregate variables. It yields a closer match to the empirical evidence of positive comovement for consumption and investment.

Keywords: DSGE Models, Long-Run Restrictions, Multi-Sector Models, Vector Auto-Regressions

JEL Classification: E13, E32

Suggested Citation

Guerrieri, Luca and Henderson, Dale W. and Kim, Jinill, Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model (2016-02-08). FEDS Working Paper No. 2016-7. Available at SSRN: https://ssrn.com/abstract=2729661 or http://dx.doi.org/10.17016/FEDS.2016.007

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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