Working Paper: CEPR ID: DP7878
Authors: Stephanie Schmitt-Grohe; Martin Uribe
Abstract: This paper identifies a new source of business-cycle fluctuations. Namely, a common stochastic trend in neutral and investment-specific productivity. We document that in U.S. postwar quarterly data total factor productivity (TFP) and the relative price of investment are cointegrated. We show theoretically that TFP and the relative price of investment are cointegrated if and only if neutral and investment-specific productivity share a common stochastic trend. We econometrically estimate an RBC model augmented with a number of real rigidities and driven by a multitude of shocks. We find that in the context of our estimated model, innovations in the common stochastic trend explain a sizable fraction of the unconditional variances of output, consumption, investment, and hours.
Keywords: common trend; investment specific technology shocks; maximum likelihood estimation of DSGE model; neutral technology shocks; sources of business cycles
JEL Codes: E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common stochastic trend in neutral and investment-specific productivity (O49) | business cycles (E32) |
| total factor productivity (TFP) and relative price of investment (O49) | common stochastic trend (C22) |
| common stochastic trend (C22) | output growth (O40) |
| common stochastic trend (C22) | consumption growth (E20) |
| common stochastic trend (C22) | investment growth (E20) |
| common stochastic trend (C22) | hours worked (J22) |