NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Business Cycles, Investment Shocks, and the "Barro-King" Curse

Guido Ascari, Louis Phaneuf, Eric Sims

NBER Working Paper No. 22941
Issued in December 2016
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model – namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies – can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

download in pdf format
   (638 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22941

Users who downloaded this paper also downloaded* these:
Ilut and Saijo w22958 Learning, Confidence, and Business Cycles
Gabaix w22954 A Behavioral New Keynesian Model
Helpman w22944 Globalization and Wage Inequality
Fernández, Schmitt-Grohé, and Uribe w22833 World Shocks, World Prices, and Business Cycles: An Empirical Investigation
Beaudry, Galizia, and Portier w22825 Putting the Cycle Back into Business Cycle Analysis
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us