IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/52159.html
   My bibliography  Save this paper

Investment Shocks: Sources of Fluctuations in Small Open Economy

Author

Listed:
  • Akande, Emmanuel

Abstract

This paper contributes to the existing Real Business Cycle (RBC) literature by introducing Marginal Efficiency of Investment (MEI) shocks into small open economic model. Investment shocks are the most important drivers of business cycle fluctuations in small open economy because the fluctuations in all the macroeconomic variables showed a significant response to MEI shocks than productivity shocks. The anticipation of pro-cyclical behavior of the external accounts when the model was augmented with the form of share of consumption in the household utility function, μ, and an appealing, but complex, concave adjustment cost function becomes a standpoint that differentiates this study from other investment shocks literatures. The pattern of the rise in investment in both shocks explains why investment shocks is so important in times of recession and it reveals the main source of fluctuations in a small open economy.

Suggested Citation

  • Akande, Emmanuel, 2013. "Investment Shocks: Sources of Fluctuations in Small Open Economy," MPRA Paper 52159, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52159
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/52159/1/MPRA_paper_52159.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2011. "Investment Shocks and the Relative Price of Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 101-121, January.
    4. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    5. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 2000. "The role of investment-specific technological change in the business cycle," European Economic Review, Elsevier, vol. 44(1), pages 91-115, January.
    6. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    7. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
    8. Robert J. Barro & Robert G. King, 1984. "Time-Separable Preferences and Intertemporal-Substitution Models of Business Cycles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 817-839.
    9. Obstfeld, Maurice, 1990. "Intertemporal dependence, impatience, and dynamics," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 45-75, August.
    10. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    11. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
    12. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    13. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
    14. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrei Polbin & Sergey Drobyshevsky, 2014. "Developing a Dynamic Stochastic Model of General Equilibrium for the Russian Economy," Research Paper Series, Gaidar Institute for Economic Policy, issue 166P, pages 156-156.
    2. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    3. D. Siena, 2014. "The European Monetary Union and Imbalances: Is it an Anticipation Story ?," Working papers 501, Banque de France.
    4. Justiniano, Alejandro & Primiceri, Giorgio E. & Tambalotti, Andrea, 2010. "Investment shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 132-145, March.
    5. Alejandro Justiniano & Claudio Michelacci, 2012. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the United States and Europe," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 169-235.
    6. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    7. Samaniego, Roberto M. & Sun, Juliana Y., 2015. "Technology and contractions: evidence from manufacturing," European Economic Review, Elsevier, vol. 79(C), pages 172-195.
    8. Eusepi, Stefano & Preston, Bruce, 2015. "Consumption heterogeneity, employment dynamics and macroeconomic co-movement," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 13-32.
    9. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    10. Nadav Ben Zeev, 2019. "Is There A Single Shock That Drives The Majority Of Business Cycle Fluctuations?," Working Papers 1906, Ben-Gurion University of the Negev, Department of Economics.
    11. Munechika Katayama & Kwang Hwan Kim, 2018. "Intersectoral Labor Immobility, Sectoral Comovement, and News Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 77-114, February.
    12. Furlanetto, Francesco & Seneca, Martin, 2014. "New Perspectives On Depreciation Shocks As A Source Of Business Cycle Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 18(6), pages 1209-1233, September.
    13. Andrea Raffo, 2008. "Technology Shocks: Novel Implications for International Business Cycles," 2008 Meeting Papers 511, Society for Economic Dynamics.
    14. Stefano Eusepi & Bruce Preston, 2009. "Labor Supply Heterogeneity and Macroeconomic Co-movement," NBER Working Papers 15561, National Bureau of Economic Research, Inc.
    15. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.
    16. Correia, Isabel & Neves, Joao C. & Rebelo, Sergio, 1995. "Business cycles in a small open economy," European Economic Review, Elsevier, vol. 39(6), pages 1089-1113, June.
    17. Seunghoon Na & Hyunseung Oh, 2020. "Computerizing Households and the Role of Investment-Specific Productivity in Business Cycles," International Finance Discussion Papers 1292, Board of Governors of the Federal Reserve System (U.S.).
    18. Peter N. Ireland, 2013. "Stochastic Growth In The United States And Euro Area," Journal of the European Economic Association, European Economic Association, vol. 11(1), pages 1-24, February.
    19. Samaniego, Roberto & Sun, Juliana, 2016. "Gray's Anatomy: Understanding Uncertainty," MPRA Paper 72787, University Library of Munich, Germany.
    20. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.

    More about this item

    Keywords

    Real Business Cycle; Marginal Efficiency of Investment; productivity shocks; adjustment cost.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:52159. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.