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Discussion Paper Details

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Title: Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity

Author(s): Stephanie Schmitt-Groh� and Mart�n Uribe

Publication Date: June 2010

Keyword(s): Common Trend, Investment Specific Technlogy Shocks, Maximum Likelihood Estimation of DSGE Model, Neutral Technology Shocks and Sources of Business Cycles

Programme Area(s): International Macroeconomics

Abstract: This paper identifies a new source of business-cycle fluctuations. Namely, a common stochastic trend in neutral and investment-specific productivity. We document that in U.S. postwar quarterly data total factor productivity (TFP) and the relative price of investment are cointegrated. We show theoretically that TFP and the relative price of investment are cointegrated if and only if neutral and investment-specific productivity share a common stochastic trend. We econometrically estimate an RBC model augmented with a number of real rigidities and driven by a multitude of shocks. We find that in the context of our estimated model, innovations in the common stochastic trend explain a sizable fraction of the unconditional variances of output, consumption, investment, and hours.

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Bibliographic Reference

Schmitt-Groh�, S and Uribe, M. 2010. 'Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7878