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International business cycles and the relative price of investment goods

Basu, P.; Thoenissen, C.

Authors

C. Thoenissen



Abstract

Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment-specific technology (IST) shock. We show that the one-to-one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short-run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.

Citation

Basu, P., & Thoenissen, C. (2011). International business cycles and the relative price of investment goods. Canadian Journal of Economics, 44(2), 580-606. https://doi.org/10.1111/j.1540-5982.2011.01645.x

Journal Article Type Article
Publication Date May 1, 2011
Deposit Date Aug 2, 2010
Journal Canadian Journal of Economics
Print ISSN 0008-4085
Electronic ISSN 1540-5982
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 44
Issue 2
Pages 580-606
DOI https://doi.org/10.1111/j.1540-5982.2011.01645.x
Keywords E22;E32;F41
Public URL https://durham-repository.worktribe.com/output/1519091