Working Paper: NBER ID: w22941
Authors: Guido Ascari; Louis Phaneuf; Eric Sims
Abstract: 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.
Keywords: Business Cycles; Investment Shocks; Barro-King Curse
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| positive investment shock (E22) | short-run contraction in consumption growth (E21) |
| positive investment shock (E22) | increase rate of return on capital (G31) |
| increase rate of return on capital (G31) | incentivizing households to save and invest more (D14) |
| incentivizing households to save and invest more (D14) | short-run contraction in consumption growth (E21) |
| roundabout production and trend output growth (E23) | escape Barro-King curse (Y70) |
| escape Barro-King curse (Y70) | positive correlation between consumption and investment growth (E20) |
| incorporating networking and growth features (D85) | enhance model's empirical plausibility (C59) |
| unconditional correlation between consumption growth and investment growth (E20) | improves significantly (D29) |
| cross-correlations between consumption and output growth (E20) | significant improvement (O39) |