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Interpreting shocks to the relative price of investment with a two‐sector model
Author(s) -
Guerrieri Luca,
Henderson Dale,
Kim Jinill
Publication year - 2019
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2728
Subject(s) - economics , investment (military) , consumption (sociology) , business cycle , interpretation (philosophy) , econometrics , relative price , investment goods , monetary economics , macroeconomics , computer science , politics , political science , law , social science , sociology , programming language
Summary Consumption and investment comove over the business cycle in response to shocks that permanently move the price of investment. The interpretation of these shocks has relied on standard one‐sector models or on models with two or more sectors that can be aggregated. We show that the same interpretation can also be motivated with a model that captures key features of the US Input–Output Tables and cannot be aggregated into a standard one‐sector model. Our alternative model yields a closer match to the empirical evidence of positive comovement for consumption and investment subject shocks that permanently move the price of investment.