Business cycles with a common trend in neutral and investment-specific productivity

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 theoret...

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Bibliographic Details
Published in:Review of economic dynamics 2011, Vol.14 (1), p.122-135
Main Authors: Schmitt-Grohé, Stephanie, Uribe, Martín
Format: Article
Language:English
Subjects:
Business cycles
Cointegration
Common shocks
Econometrics
Economic fluctuations
Economic shock
Investment
Investment specific shocks
Macroeconomics
Prices
Productivity
Sources of business cycles
Stochastic models
Studies
Technological change
Technology shocks
Total factor productivity
U.S.A
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Summary: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.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2010.07.001