Investment Shocks and Business Cycles

53 Pages Posted: 27 Mar 2008

See all articles by Alejandro Justiniano

Alejandro Justiniano

Federal Reserve Bank of Chicago

Giorgio E. Primiceri

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Andrea Tambalotti

Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: July 16, 2008

Abstract

Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. We reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. We also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, we show that imperfect competition and, to a lesser extent, technological frictions are the key to the transmission of investment shocks in the model.

Keywords: DSGE model, imperfect competition, endogenous markups, Bayesian methods, Business Cycles, Bayesian Estimation

JEL Classification: C11, C30, E22, E30, E32

Suggested Citation

Justiniano, Alejandro and Primiceri, Giorgio E. and Tambalotti, Andrea, Investment Shocks and Business Cycles (July 16, 2008). FRB of New York Staff Report No. 322, FRB of Chicago Working Paper No. 2008-12, Available at SSRN: https://ssrn.com/abstract=1112718 or http://dx.doi.org/10.2139/ssrn.1112718

Alejandro Justiniano

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Giorgio E. Primiceri

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://faculty.econ.northwestern.edu/faculty/primiceri

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andrea Tambalotti (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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