Uncertainty shocks and the relative price of investment goods

Abstract

This study empirically shows that higher uncertainty leads to not only a simultaneous drop in consumption and investment, but also a rise in the relative price of investment goods. This negative relationship between the relative price and quantity of investment suggests that heightened uncertainty depresses investment as an adverse supply shock to the investment sector. We demonstrate that a two-sector sticky price model with realistic asymmetric sectoral price rigidity can successfully account for our empirical findings. In particular, the underlying mechanism behind the negative relationship between the price and quantity of investment is limited intersectoral factor mobility. By contrast, the standard two-sector model featuring perfect factor mobility causes a negative co-movement between consumption and investment, contradicting the business cycle phenomenon.

Understanding the Macroeconomic Impact of Illiquidity Shocks in the United States

“…Finally, we find that the relative price of investment goods increases significantly in response to an illiquidity shock after four quarters and beyond. This is similar to the empirical finding on uncertainty shocks documented by Katayama and Kim () that increased uncertainty induces a rise in relative price of investment goods. Along with the historical decomposition shown in Figure in Section B, illiquidity shocks can depress investment spending.…”

The effect of real exchange rate volatility on income distribution in South Africa

“…Technology-driven declines in investment prices will lead to greater demand for investment, and hence a decline in the labour share, if factor prices are determined completely and the elasticity of substitution between capital and labour is greater than one (Schwellnus et al 2018). Analogously, an increasing relative investment price will lead to declining capital intensity (Katayama and Kim 2018), and hence rising labour share, if capital and labour are substitutes. The effect of the relative investment price on inequality, as shown in Figure 4, is mainly positive, the only exception being for the second and seventh quarters.…”

Macroeconomic effects of inflation target uncertainty shocks

“…There exists a growing literature on the macroeconomic implications of uncertainty shocks. Bloom (2009); Fernández-Villaverde et al (2011); Gilchrist et al (2014); Bloom et al (2018); Katayama and Kim (2018); Kozeniauskas et al (2018) find that economic uncertainty has significant impacts on different sets of macroeconomic variables and that the increase in the uncertainty level contributed to slow economic recoveries and persistence of high levels of unemployment rates (Stock and Watson, 2012;Baker et al, 2016). Annicchiarico et al (2011) and Annicchiarico and Rossi (2015) find a non-negligible relationship between uncertainty and long-run growth, which depends on the monetary authority interest rate (Taylor rule) being considered and, in particular, its smoothing parameter.…”