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INVESTMENT SHOCKS, CONSUMPTION PUZZLE, AND BUSINESS CYCLES
Author(s) -
Choi Yoonseok
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12856
Subject(s) - economics , consumption (sociology) , investment (military) , shock (circulatory) , business cycle , discounting , hyperbolic discounting , monetary economics , demand shock , microeconomics , macroeconomics , econometrics , finance , medicine , social science , sociology , politics , political science , law
A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. ( JEL E3, E7)