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

Board of Governors of the Federal Reserve System

Dale W. Henderson

Federal Reserve Board

Jinill Kim

Korea University

Date Written: February, 2016

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, multisector models, vector autoregressions

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 (February, 2016). 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)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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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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