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The Endogenous Relative Price of Investment

Author

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  • Joel Wagner
Abstract
This paper takes a full-information model-based approach to evaluate the link between investment-specific technology and the inverse of the relative price of investment. The two-sector model presented includes monopolistic competition where firms can vary the markup charged on their product depending on the number of firms competing. With these changes to the standard two-sector model, both total factor productivity as well as a series of non-technological shocks can impact the high-frequency volatility of the relative price of investment. Utilizing a Bayesian estimation approach to match the model to the data, we find that investment-specific technology can explain at most half of the growth rate of the relative price of investment. Last of all, we compare the benchmark model results with endogenous movement in the relative price of investment to a model where all movement in the relative price of investment is derived exogenously. This is done by allowing technologies across sectors to move together over time. Comparison of these two methods finds that the exogenous approach is incapable of capturing changes in the relative price of investment as found in the data. This paper adds to the growing list of research, like that of Fisher (2009) and Basu et al. (2013), that suggests that the quality-adjusted relative price of investment may be a poor indicator of investment-specific technology.

Suggested Citation

  • Joel Wagner, 2015. "The Endogenous Relative Price of Investment," Staff Working Papers 15-30, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-30
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2015/07/wp2015-30.pdf
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    References listed on IDEAS

    as
    1. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    2. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1238-1252, October.
    3. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    4. Stephanie Schmitt-Grohe & Martin Uribe, 2011. "Business Cycles With A Common Trend in Neutral and Investment-Specific Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 122-135, January.
    5. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
    6. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
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    9. Marc‐André Letendre & Daqing Luo, 2007. "Investment‐specific shocks and external balances in a small open economy model," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 650-678, May.
    10. Paul Beaudry & Bernd Lucke, 2010. "Letting Different Views about Business Cycles Compete," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 413-455, National Bureau of Economic Research, Inc.
    11. Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June.
    12. Marc-André Letendre & Daqing Luo, 2007. "Investment-specific shocks and external balances in a small open economy model," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 650-678, May.
    13. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
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    Cited by:

    1. Alban Moura, 2018. "Investment Shocks, Sticky Prices, and the Endogenous Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 48-63, January.
    2. Anthony Landry, 2018. "Capital-Goods Imports and U.S. Growth," 2018 Meeting Papers 208, Society for Economic Dynamics.

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    More about this item

    Keywords

    Business fluctuations and cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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