Productivity shocks, investment, and the real interest rate
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Productivity shocks, investment, and the real interest rate

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Published by Federal Reserve Bank of Boston in Boston .
Written in English

Subjects:

  • Industrial productivity -- Econometric models.,
  • Interest rates -- Economic aspects -- Econometric models.,
  • Investments -- Econometric models.

Book details:

Edition Notes

Statementby Giovanni Olivei.
SeriesWorking paper series Federal Reserve Bank of Boston -- no. 99-2., Working paper (Federal Reserve Bank of Boston) -- no. 99-2.
The Physical Object
Pagination31, [6] p. :
Number of Pages31
ID Numbers
Open LibraryOL17704570M

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Downloadable! I analyze the effects of a favorable shift in expected future productivity on the current level of investment and the real interest rate. In a standard RBC model, an increase in expected future productivity raises the real rate, but decreases the current level of investment for plausible parameter values of the intertemporal elasticity of substitution in consumption. Productivity shocks, investment, and the real interest rate. By Giovanni Olivei. Abstract. I analyze the effects of a favorable shift in expected future productivity on the current level of investment and the real interest rate. In a standard RBC model, an increase in expected future productivity raises the real rate, but decreases the current Author: Giovanni Olivei. The crucial role of productivity shocks on the long-run real exchange rate has been recently supported by the work of Alexius (), who finds that when considering the relationship between funda Author: Annika Alexius.   But the impact of real interest rates has changed since the global financial crisis. For instance, a positive real interest rate shock post has a weaker impact on labour productivity growth than a similar shock that increased labour productivity pre Post positive real interest rate shocks did not have a significant effect on.

Since in this exercise interest rate shocks are orthogonal to productivity shocks, the induced correlation between consumption and income and investment and income is low, contrary to the data. The response of output, on impact, to a rise in the interest rate will be small as productivity has not changed and capital takes time to adjust. components through Kalman filtering of the level of productivity, and base investment and asset accumulation decisions on these projections.3 In a sense, this model extends the work of Moore and Schaller () who study investment in a context where agents cannot observe whether shocks to the real interest rate are permanent or transitory. an e ect of the real interest rate on labor supply) that is the hallmark of theWilliamson () approach was ultimately confusing to students. It required spending too much time on a baseline market-clearing model of the business cycle and prevented moving more quickly to a framework where important policy implications could be addressed. In most advanced economies, both real interest rates and productivity growth have decreased since the early s. In this paper, we explore the mechanism whereby a circular relationship links these two quantities. While productivity is a key driver of potential output which affects the level of interest rates, the level of interest rates is a determinant of the expected return from investment projects, and thus of the productivity level required for investment.

  Bank productivity shocks generate a reduction of the rate on loans and of interest margins that is inversely related to the productivity of banks. In Sweden, the country with the most productive banks, the impact of a one standard deviation shock is negligible, while in Spain, the country where banks are least productive, the same shock. The real business cycle theory also takes into account the role of real interest rate in response to a technological shock. The real interest is equal to the marginal product of capital. When a favourable technological change leads to a boom, the marginal product of capital and the real interest rate rise.   The investment at period t accumulates productive capital available at period t+1, and there is a cost of adjustment that depends on the net investment. non tradable productivity, real interest rate and preferences respectively. The size of each shock is normalized to one standard deviation. The effects of an international real interest. In this paper, we consider how economic productivity in one country affects another country. Our objective is to understand the shock transmission between the two countries. In real business cycle models, economic agents efficiently allocate consumption and investment in response to productivity shocks.