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

Stephanie Schmitt-Grohé, Martín Uribe

NBER Working Paper No. 16071
Issued in June 2010
NBER Program(s):   EFG

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.

Published: Stephanie Schmitt-Grohe & Martin Uribe. "Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics. Volume 14, Issue 1. (January 2011)

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Acknowledgments

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