Investment shocks and business cycles

Abstract

We study the driving forces of fluctuations in an estimated New Neoclassical Synthesis model of the U.S. economy with several shocks and frictions. In this model, shocks to the marginal efficiency of investment account for the bulk of fluctuations in output and hours at business cycle frequencies. Imperfect competition and, to a lesser extent, technological frictions are the key to their transmission. Labor supply shocks explain a large fraction of the variation in hours at very low frequencies, but are irrelevant over the business cycle. This is important because their microfoundations are widely regarded as unappealing.

Technology shocks, capital utilization and sticky prices

“…To place the degree of price stickiness into perspective, a transformation of the Rotemberg-style costs used here into Calvo-style rigidity results in roughly 94.5 percent of firms being unable to change their prices pre-1979 and 84.3 percent post-1979 (see Chugh, 2006). While the pre-1979 estimate appears high, the post-1979 estimate is close to estimates obtained by Justiniano et al (2010) and others for the entire post-war sample. How do these parameter estimates influence the impact of innovations to TFP and MEI?…”

“…4 This is not to say that models with these features are unable to generate the results presented here. For example, Justiniano et al (2010) estimate an extension of Smets and Wouters (2003) using Bayesian techniques and show a dominance of MEI shocks over the business cycle, a positive response of labor hours to a positive MEI shock, as well as a negative response of labor hours to a positive (albeit, labor-augmenting) TFP shock. 5 Their model is a medium-scale DSGE framework featuring many of the frictions and mechanisms discussed above, and estimated using the entire post-war US data.…”

Optimal inflation rates with the trending relative price of investment

“…Nð0; σ 2 υ Þ. On the other hand, υ I;t is constant at υ I;t ¼ 1 for all t. In the first-order approximation, υ c;t reduces to a shock to the markup λ c as in Smets and Wouters (2007) and Justiniano et al (2010). 7…”

Taylor rules, long-run growth and real uncertainty

“…The parameter governing the investment adjustment costs, i.e. γ I , is calibrated at 2.85 as in Justiniano et al (2010).…”