Interpreting shocks to the relative price of investment with a two-sector model |
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Authors: | Luca Guerrieri Dale Henderson Jinill Kim |
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Institution: | 1. Federal Reserve Board, Washington, District of Columbia, United States;2. Federal Reserve Board (Retired), Washington, District of Columbia, United States;3. Department of Economics, Korea University, Seoul, South Korea |
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Abstract: | 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. |
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