Sources of Business Fluctuations: Financial or Technology Shocks?

Review of Economic Dynamics, 2014, vol. 17, issue 2, 224-242

Abstract: Despite the widespread belief that technology shocks are the main source of business fluctuations, recent empirical studies indicate that in the absence of financial frictions, a shock to the marginal efficiency of investment is the main source and is closely related to financial conditions for investment. We incorporate a financial accelerator mechanism and two types of financial shocks to the external finance premium and net worth in a dynamic stochastic general equilibrium model with shocks to the marginal efficiency of investment, the investment-good price markup, and the rates of neutral and investment-specific technological changes. This model is estimated using eleven US time series that include data on loan, net worth, the loan rate, and the relative price of investment. Our estimation results show that the (non-stationary) neutral and investment-specific technology shocks primarily drive output and investment fluctuations, while the external finance premium shock plays an important role for investment fluctuations. This financial shock induced substantial falls and subsequent sharp hikes in the external finance premium and caused boom-bust cycles over the past two decades. (Copyright: Elsevier)

Keywords: Business fluctuations; Neutral and investment-specific technology shocks; Financial accelarator mechanism; External finance premium shock; boom-bust cyle (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E51 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (37)

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DOI: 10.1016/j.red.2013.08.001

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