Firm-Speci c Capital, Productivity Shocks and Investment Dynamics

Abstract

The theoretical literature on business cycles predicts a positive investment response to productivity improvements. In this work we question this prediction from theoretical and empirical standpoints. We rst show that a negative short-term response of investment to a positive technology shock is consistent with a plausibly parameterized new Keynesian DSGE model in which capital is \u85rm-speci\u85c and monetary policy is not fully accommodative. Employing Bayesian techniques, we then provide evidence that perma-nent productivity improvements have short-term contractionary e¤ects on investment. Even if this result emerges in both the \u85rm-speci\u85c and rental capital speci\u85cations, only with the former the estimated av-erage price duration is in line with microeconometric evidence. In the \u85rm-speci\u85c capital model, strategic complementarity in price setting leads to a degree of price inertia which is higher than that implied by the frequency at which \u85rms change their prices. JEL CLASSIFICATION: E32, E22, C11

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