Bank of Lithuania
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2016-11-30

No 36. Giuliano Curatola, Michael Donadelli, Patrick Grüning, Christoph Meinerding. Investment-specific shocks, business cycles, and asset prices

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This paper proposes and tests a new source of time variation in real investment opportunities, namely long-run shocks to the productivity of the investment sector, to explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable return volatility differential between the investment and consumption sector. Moreover, positive long-run investment shocks are associated with low marginal utility and thus command a positive risk premium. We test our model using data on sectoral TFP and find evidence in support of our theoretical predictions.

JEL Codes: E32, G12.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Giuliano Curatola, Michael Donadelli, Patrick Grüning, Christoph Meinerding, General Equilibrium Asset Pricing, Production Economy, Long-Run Risk, Investment-Specific Shocks, wage rigidities