Investment shocks and macroeconomic co-movement
- Francesco Furlanetto, Gisle J. Natvik and Martin Seneca
- Working Paper
Recent studies find that shocks to the marginal efficiency of investment are a main driver of business cycles. Yet, they struggle to explain why consumption co-moves with real variables such as investment and output, which is a typical feature of an empirically recognizable business cycle. In this paper we show that within a conventional business cycle model, rule-of-thumb consumption provides a straightforward explanation of macroeconomic co-movement after a shock to the marginal efficiency of investment.
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ISSN 1502-8190 (online)