33 Pages Posted: 14 Oct 2003
Date Written: October 2003
Stock market prices, a measure of the marginal cost of installed capital, are procyclical. Yet, prices of investment goods, the main input into new installed capital, are countercyclical. We exploit this information to identify the driving forces of the business cycle and the nature of capital installation costs. In our model installation costs are increasing in the growth of investment, and the business cycle is driven by permanent investment-specific technology shocks and transitory neutral technology shocks. When calibrated to the capital price observations, the model does well at accounting for the main features of asset returns and the business cycle of macroeconomic aggregates. In addition, unlike most other models, our's accounts for sectoral comovement in both output and factor inputs.
Suggested Citation: Suggested Citation
Christiano, Lawrence J. and Fisher, Jonas D. M., Stock Market and Investment Goods Prices: Implications for Macroeconomics (October 2003). NBER Working Paper No. w10031. Available at SSRN: https://ssrn.com/abstract=457553