Working Paper: NBER ID: w10031
Authors: Lawrence J. Christiano; Jonas D. M. Fisher
Abstract: Stock market prices, a measure of the marginal cost of installed capital, are procyclical. Yet, prices of investment goods, the main input into new installed capital, are countercyclical. We exploit this information to identify the driving forces of the business cycle and the nature of capital installation costs. In our model installation costs are increasing in the growth of investment, and the business cycle is driven by permanent investment-specific technology shocks and transitory neutral technology shocks. When calibrated to the capital price observations, the model does well at accounting for the main features of asset returns and the business cycle of macroeconomic aggregates. In addition, unlike most other models, our's accounts for sectoral comovement in both output and factor inputs.
Keywords: No keywords provided
JEL Codes: E10; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market prices (G10) | business cycle (E32) |
| investment goods prices (E30) | business cycle (E32) |
| neutral technology shocks (E39) | stock market prices (G10) |
| investment-specific technology shocks (O39) | investment goods prices (E30) |
| neutral technology shocks (E39) | demand for investment goods (E22) |
| demand for investment goods (E22) | stock market prices (G10) |