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MODELING INVESTMENT‐SECTOR EFFICIENCY SHOCKS: WHEN DOES DISAGGREGATION MATTER?
Author(s) -
Guerrieri Luca,
Henderson Dale,
Kim Jinill
Publication year - 2014
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12075
Subject(s) - investment (military) , economics , productivity , shock (circulatory) , consumption (sociology) , odds , sector model , capital (architecture) , econometrics , monetary economics , macroeconomics , mathematics , statistics , medicine , history , ecology , social science , logistic regression , archaeology , sociology , politics , biology , political science , law , agriculture
The most straightforward way to analyze investment‐sector productivity developments is to construct a two‐sector model with a sector‐specific productivity shock. An often used modeling shortcut accounts for such developments using a one‐sector model with shocks to the efficiency of investment in a capital accumulation equation. This shortcut is theoretically justified when some stringent conditions are satisfied. Using a two‐sector model, we consider the implications of relaxing several of the conditions that are at odds with the U.S. Input–Output Tables, including equal factor shares across sectors. The effects of productivity shocks to an investment‐producing sector of our two‐sector model differ from those of efficiency shocks to investment in a one‐sector model. Notably, expansionary productivity shocks boost consumption in every period, whereas expansionary efficiency shocks cause consumption to fall substantially for many periods.