Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model

Guerrieri, Luca; Henderson, Dale W.; Kim, Jinill

doi:10.17016/FEDS.2016.007

Working Paper

Interpreting Shocks to the Relative Price of Investment with a Two-Sector Model

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. However, the same interpretation continues to go through in models that cannot be aggregated into a standard one-sector model. Furthermore, such a two-sector model with distinct factor input shares across production sectors and commingling of sectoral outputs in the assembly of final consumption and investment goods, in line with the U.S. Input-Output Tables, has implications for aggregate variables. It yields a closer match to the empirical evidence of positive comovement for consumption and investment.

Keywords: DSGE Models; Long-Run Restrictions; multisector models; vector autoregressions;

JEL Classification: E13; E32;

https://doi.org/10.17016/FEDS.2016.007