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- Title
INVESTMENT SHOCKS, CONSUMPTION PUZZLE, AND BUSINESS CYCLES.
- Authors
Choi, Yoonseok
- Abstract
A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding.
- Subjects
UNITED States; BUSINESS cycles; MARGINAL efficiency of investment; MACROECONOMICS; UNITED States economy; KEYNESIAN economics
- Publication
Economic Inquiry, 2020, Vol 58, Issue 3, p1387
- ISSN
0095-2583
- Publication type
Article
- DOI
10.1111/ecin.12856