Investment shocks and the comovement problem

Journal of Economic Dynamics and Control, 2010

We quantitatively evaluate a business-cycle environment featuring endogenous capital utilization and nominal price rigidity that illustrates a negative relationship between labor hours and technology (TFP) shocks and a positive relationship between hours and investment (MEI) shocks. Sticky prices induce firms to suppress changes in output due to TFP shocks through changes in the utilization rate of the existing capital stock and labor demand. MEI shocks have an indirect impact on output via their link with capital utilization, and are shown to be the dominant driver of post-1979 US business cycles.

I investigate a model of the U.S. economy with nominal rigidities and a financial accelerator mechanism à la Bernanke et al. (1999). I calculate total factor productivity and monetary policy deviations for the U.S. and quantitatively explore the ability of the model to account for the cyclical patterns of GDP (excluding government), investment, consumption, the share of hours worked, inflation and the quarterly interest rate spread between the Baa corporate bond yield and the 20-year Treasury bill rate during the Great Moderation. I show that the magnitude and cyclicality of the external finance premium depend nonlinearly on the degree of price stickiness (or lack thereof) in the Bernanke et al. (1999) model and on the specification of both the target Taylor (1993) rate for policy and the exogenous monetary shock process. The strong countercyclicality of the external finance premium induces substitution away from consumption and into investment in periods where output grows above its long-run trend as the premium tends to fall below its steady state and financing investment becomes temporarily cheaper. The less frequently prices change in this environment, the more accentuated the fluctuations of the external finance premium are and the more dominant they become on the dynamics of investment, hours worked and output. However, these features—the countercyclicality and large volatility of the spread—are counterfactual and appear to be a key impediment limiting the ability of the model to account for the U.S. data over the Great Moderation period.

2016

Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model-namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies-can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

SSRN Electronic Journal

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we estimate investment equations for three types of fixed assets and three policy instruments. In particular, we disaggregate investment into structures, equipment and intangibles, and the policy instruments into the rates of replacement, interest and taxes. Additionally, we estimate an equation for total investment. At the aggregate level the long run elasticities of investment with respect to output and the user cost are found to vary narrowly around 0.83; the direct elasticities of investment with respect to the rates of replacement, interest and taxation are 0.91,-0.04 and-0.23, whereas the indirect and inversely additive ones through the user cost are-0.11,-0.05 and-0.27, respectively. To highlight the significance of these findings, we investigate their implications for economic growth by focusing on four policy channels, i.e. aggregate demand, relative prices, and monetary and fiscal policies. We conclude that monetary policy may be weak to stimulate investment, and even fall into the trap of the law of unintended consequences by slowing replacement investment down, since the average age of capital is related negatively to the discount rate. On the contrary fiscal policy is relatively more potent as a 10% reduction in the expected effective tax rate is found to boost investment directly and indirectly by as much as 5%. In general, first best policies would aim at increasing the replacement rate, particularly of intangibles and equipment in the same order.

American Economic Journal: Macroeconomics, 2013

The sensitivity of US aggregate investment to shocks is procyclical. The response upon impact increases by approximately 50 percent from the trough to the peak of the business cycle. This feature of the data follows naturally from a DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis. (JEL E13, E22, E32)

Journal of Monetary Economics, 1996

This paper presents and estimates a variant of Hansen and Sargent's (1988) real business cycle model with straight time and overtime. The model presented has only one latent variable, the state of technology, yet it does as good a job propagating and magnifying shocks as labor hoarding models which incorporate unobserved effort. This paper also finds that the implied effort series of labor hoarding models displays a high coherence with U.S. overtime data at business cycle frequencies. This supports the view that effort is procyclical. 1 I n t r o d u c t i o n This paper estimates a dynamic general equilibrium real business cycle model of the U.S. economy incorporating straight time and overtime. This model is a hybrid of Hansen and Sargent's (1988) model with straight time and overtime and Burnside, Eichenbaum and Rebelo's (1993) labor hoarding model. This model is studied along with an estimated version of Burnside, Eichenbaum and Rebelo's model. The two models are analyzed to answer two questions. First, how do different assumptions about laoor market rigidities effect the real business cycle model's ability to propagate and magnify shocks? Second, does the unobservable time series effort implied by the labor hoarding models make sense?

Journal of Money, Credit and Banking, 2015

This paper provides robust evidence that news shocks about future investmentspecific technology (IST) constitute a significant force behind U.S. business cycles. Using a recent empirical approach to identifying news shocks, we find that positive IST news shocks induce comovement, i.e., raise output, consumption, investment, and hours. These shocks account for 70% of the business cycle variation in output, hours, and consumption, and 60% of the variation in investment, and have played an important role in nine of the last ten U.S recessions. IST news shocks also dominate unanticipated IST shocks in accounting for the forecast variance of aggregate variables. The findings have two important implications for research on news driven business cycles. First, they provide strong support for shifting focus to IST news shocks when investigating the role of news (or foresight) in driving business cycles. Second, an important avenue for further research is to consider structural mechanisms that can enhance the role of IST news shocks in estimated dynamic general equilibrium models.

2007

This paper investigates the relative importance of shocks to total factor productivity (TFP) versus the marginal efficiency of investment (MEI) in explaining cyclical variations. The literature offers contrasting results: TFP shocks are important in neoclassical environments, while relatively unimportant in neo-Keynesian environments. A model with endogenous capital utilization captures both results depending upon the degree of nominal rigidity. In the model, MEI shocks create a wedge between the nominal returns on bonds and capital. Nominal rigidities activate this wedge and place the relative importance on MEI shocks, while TFP shocks dominate when prices are perfectly flexible.

2015

To reproduce key features of the post-war U.S. data, most monetary business cycle models must assume there are high price markups and that agents have high labour supply elasticities. Unfortu-nately, microeconomic evidence indicates that markups and labour supply elasticities are generally low. This paper eliminates the need for these assumptions by introducing imperfectly observed effort into a limited participation model. In the model, detected shirkers forgo a bonus and house-holds make their decisions about their level of monetary deposits for the period in advance of seeing the shocks to the economy. The estimated model is better able to capture the sluggish response of prices to a monetary policy shock than the standard model, and is consistent with recent evidence regarding the qualitative responses of the U.S. economy to technology shocks, fiscal policy shocks and monetary policy shocks. (JEL E32, E4)

Journal of Monetary Economics, 2001

Although there has been substantial research using long-run co-movement (cointegration) restrictions in the empirical macroeconomics literature, little or no work has been done investigating the existence of short-run co-movement (common cycles) restrictions and discussing their implications. In this paper we first investigate the existence of common cycles in a aggregate data set comprising per-capita output, consumption, and investment. Later we discuss their usefulness in measuring the relative importance of transitory shocks. We show that, taking into account common-cycle restrictions, transitory shocks are more important than previously thought at businesscycle horizons. The central argument relies on efficiency gains from imposing these short-run restrictions on the estimation of the dynamic model. Finally, we discuss how the evidence here and elsewhere can be interpreted to support the view that nominal $ We gratefully acknowledge comments from Heather Anderson, Wouter den (J.V. Issler). 0304-3932/01/$ -see front matter r 2001 Elsevier Science B.V. All rights reserved. PII: S 0 3 0 4 -3 9 3 2 ( 0 1 ) 0 0 0 5 2 -6 shocks may be important in the short run. r

2016

This dissertation investigates non-linear macroeconomic dynamics within the New Keynesian model during periods with zero short-term nominal interest rates. I implement modern quantitative tools to solve and analyze Dynamic Stochastic General Equilibrium (DSGE) models where the feedback rule that defines monetary policy is subject to the Zero Lower Bound (ZLB) constraint. The revived attention about the importance of the ZLB constraint followed the extreme events that took place in the United States after the financial crisis of 2008. The first chapter studies aggregate dynamics near the ZLB of nominal interest rates in a medium-scale New Keynesian model with capital. I use Sequential Monte Carlo methods to uncover the shocks that pushed the U.S. economy to the ZLB during the Great Recession and investigate the interaction between shocks and fric-tions in generating the contraction of output, consumption and investment during 2008:Q3-2013:Q4. I find that a combination of shocks to th...

2017

We demonstrate that the model in Fisher (2007) produces two counterfactual results when the capital tax rate is calibrated to 35%---a rate consistent with estimates of the effective tax rate in the literature. First, household investment lags business investment. Second, household investment is less volatile than business investment with a relative volatility of .62. We show that increasing the degree of household capital complementarity cannot resolve these problems because the model produces counterfactual factor shares in market production relative to the empirical estimates in Fisher (2007). Accounting for U.S. investment dynamics, therefore, remains a significant challenge for macroeconomists.

Journal of Risk and Financial Management, 2021

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and five. Focusing on the four-shock specification, we identify, using sign restrictions, two policy shocks, monetary and fiscal, and two non-policy shocks, demand and supply. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Monetary and fiscal policy shocks have sizable effects on output and prices, with no evidence of crowding-out of private aggregate demand components; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian “cleansing” view of recessions.

SSRN Electronic Journal, 2000

We construct a vintage capital model in which worker skills lie along a continuum and workers can be paired with different vintages (as technology evolves) under a matching rule of "best worker with the best machine".

2020

We offer a tale of two major postwar business cycle episodes: the pre-1980s and the post-1982s prior to the Great Recession. We revisit the sources of business cycles and the reasons for the large variations in aggregate volatility from the first to the second episode. Using a medium-scale DSGE model where monetary policy potentially has cost-channel effects, we first show the Fed most likely targeted deviations of output growth from trend growth, not the output gap, for measure of economic activity. When estimating our model with a policy rule reacting to output growth with Bayesian techniques, we find the US economy was not in a state of indeterminacy in either of the two sub-periods. Thus, aggregate instability before 1980 did not result from self-fulfilling changes in inflation expectations. Our evidence shows the Fed reacted more strongly to inflation after 1982. Based on sub-period estimates, we find that shocks to the marginal efficiency of investment largely drove the cyclic...