Norges Bank

Working Paper

Investment-specific technology shocks and consumption

Francesco Furlanetto and Martin Seneca
Working Paper

Current business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that a positive investment-specific technology shock generally induces a negative consumption response. The objective of this paper is to investigate whether positive consumption responses to investment-specific technology shocks can be obtained in a modern business cycle model. We find that the answer to this question is yes. With a combination of nominal rigidities and non-separable preferences, the consumption response is positive for general parameterisations of the model.

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ISSN 1502-8190 (online)

Published 22 December 2010 08:51
Published 22 December 2010 08:51