BibTeX
@MISC{Dupor09solvingthe,
author = {Bill Dupor and M. Saif Mehkari},
title = {Solving the Procyclical News Shock Problem ∗},
year = {2009}
}
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Abstract
This paper constructs model economies that are capable of producing positive comovement in consumption, labor hours, and investment, in response to positive news shocks about future technology. In contrast, the standard neo-classical model cannot. We prove that a single departure from the neo-classical model- a strictly convex production frontier between consumption and investment- along with a high intertemporal consumption elasticity, is sufficient to support a technology news-driven boom. While procyclical, the boom in key variables is quantitatively small. The further addition of vintage capital magnifies the boom significantly. By vintage capital, we mean that the pre-existing capital stock’s efficiency grows by relatively less than does future capital investment in response to the shock. J.E.L. Classification: E3.
Keyphrases
procyclical news shock problem vintage capital high intertemporal consumption elasticity model economy key variable j.e.l. classification labor hour standard neo-classical model cannot neo-classical model positive comovement single departure convex production frontier pre-existing capital stock efficiency grows technology news-driven boom future capital investment future technology positive news shock
