Working Paper: CEPR ID: DP7598
Authors: Alejandro Justiniano; Giorgio E. Primiceri; Andrea Tambalotti
Abstract: We estimate a New-Neoclassical Synthesis business cycle model with two investment shocks. The first, an investment-specific technology shock, affects the transformation of consumption into investment goods and is identified with the relative price of investment. The second shock affects the production of installed capital from investment goods or, more broadly, the transformation of savings into the future capital input. We find that this shock is the most important driver of U.S. business cycle fluctuations in the post-war period and that it is likely to proxy for more fundamental disturbances to the functioning of the financial sector. To corroborate this interpretation, we show that it correlates strongly with interest rate spreads and that it played a particularly important role in the recession of 2008.
Keywords: business cycles; DSGE model; financial factors; investment specific technology
JEL Codes: C11; E22; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relative price of investment (G11) | MEI shock (C69) |
| investment-specific technology shock (O39) | business cycle fluctuations (E32) |
| MEI shock (C69) | interest rate spreads (E43) |
| MEI shock (C69) | U.S. business cycle fluctuations (F44) |