Investment Shocks, Consumption Puzzle, and Business Cycles

Choi, Yo Han

doi:10.1111/ecin.12856

Cited by 2 publications

(3 citation statements)

References 29 publications

(64 reference statements)

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“…The characteristic (cubic) polynomial the Eigenvalues can be solved through factorisation and the quadratic formula as follows (where θ represents a constant). 6 The closed-form expressions for the Eigenvalues are:…”

Section: B Derivation Of Theoretical Resultsmentioning

confidence: 99%

“…The first order conditions of the auxiliary maximisation problem are as follows, where equations ( 4) and ( 5) ensure that optimal intra-temporal decisions of the agent are respected and equation (6) indirectly determines the equilibrium path of the labour tax wedge τ t .…”

Section: Model Setupmentioning

confidence: 99%

“…Choi (2020) resolves the comovement problem in a standard neoclassical model which features time inconsistent agents who engaged in naive hyperbolic discounting. These naive agents tend towards immediate gratification…”

mentioning

confidence: 97%

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Investment Shocks: The Labour Wedge and the Comovement Problem

Caswell

2021

SSRN Journal

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Shocks to the marginal efficiency of investment (MEI) play a significant role in business cycle fluctuations. However, in standard quantitative models, positive (negative) MEI shocks tend to cause consumption to fall (rise) on impact while investment rises (falls). This conflicts with the well-established observation that consumption and investment are both procyclical and move together over the business cycle. This paper demonstrates that MEI shocks can generate positive comovement between consumption and investment in a standard RBC framework through the inclusion of a time-varying labour wedge. This allows for tractable analytical expressions, and straightforward graphical interpretations, which describe the subset of the parameter space where positive comovement is achieved.

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Section: B Derivation Of Theoretical Resultsmentioning

confidence: 99%

Section: Model Setupmentioning

confidence: 99%