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THE ROLE OF INVESTMENT-SPECIFIC TECHNOLOGY SHOCKS IN DRIVING INTERNATIONAL BUSINESS CYCLES: A BAYESIAN APPROACH

Published online by Cambridge University Press:  21 November 2016

Jaya Dey
Jaya Dey*
Affiliation:
Saint Louis University
*
Address correspondence to: Jaya Dey, Department of Economics, 220 Cook Hall, Saint Louis University, St. Louis, MO 63103, USA; e-mail: [email protected].
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Abstract

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This paper uses a Bayesian approach to estimate a standard international real business cycle model augmented with preferences with zero wealth effect, variable capacity utilization, and investment adjustment costs. First, I find that the bulk of fluctuations in country-specific outputs, consumption, investments, and international relative prices can be attributed to country-specific neutral technology, investment-specific technology, and preference shocks. Second, my estimated model with economically meaningful shocks simultaneously accounts for the negative correlation between the real exchange rate and relative consumption and the negative correlation between the terms of trade and relative output. Last, through a marginal likelihood comparison exercise, I find that the success of the model depends on preferences with zero wealth effects; other frictions and alternative asset market structures play a less important role.

Keywords

BayesianInvestment-Specific TechnologyReal Exchange Rate
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 3 , April 2017 , pp. 555 - 598
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

I am grateful to Bill Dupor, Nan Li, Paul Evans, and Masao Ogaki for their guidance. I also thank Aubhik Khan, Julia Thomas, Joe Kaboski, Fabrizio Perri, Patrick Kehoe, Ariel Burstein, Jesper Linde, Giancarlo Corsetti, Jesús Fernández-Villaverde, Gianluca Violante, Kenneth West, and the seminar participants at the 2011 Computational Economics and Finance Meeting, the Ohio State University, Oklahoma State University, Kansas University, the 2010 Southern Economic Association Meeting, and the 2010 Midwest Economics Association Meeting which greatly improved the quality of the paper. I am thankful to Pau Rabanal for providing me with the relevant data. All errors are my own.

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