Investment-Specific Technology Shocks in a Small Open Economy

Mulraine, Millan L. B. (2005): Investment-Specific Technology Shocks in a Small Open Economy.

Abstract

In this paper we examine the behavioral responses of key macroeconomic variables in Canada to exogenous innovations to investment specific technology. This is done by developing a stylized international real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can quantitatively replicate the key dynamic features of the post-war Canadian economy, and thus shocks to investment-specific technology can be considered an important propagation mechanism for studying and understanding modern macroeconomic dynamics in small open economies. Moreover, when the model was augmented with an endogenous utilization rate it was able to generate the counter-cyclical behavior of the external accounts - without appealing to an adjustment cost parameter and/or a propagation mechanism whose volatility and persistence are artificially low.

• Item Type: MPRA Paper
• Language: English
• Keywords: Endogenous rate of time preference; Investment-specific shocks; Relative price of investment goods
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

Baxter, M. (1995). International trade and business cycles. In Grossman, G. M. and Rogoff, K. S., editors, Handbook of International Economics, volume 3, pages 1801–1864. North-Holland, Amsterdam.

Boileau, M. (2002). Trade in capital goods and investment-specific technical change. Journal of Economic Dynamics and Control, 26:963–984.

Epstein, L. and Hynes, A. (1983). The rate of time preference and dynamic economic analysis. Journal of Political Economy, 91:611–625.

Fisher, J. D. M. (1999). The new view on growth and business cycles. Economic Perspectives,23(1):34–56.

Fisher, J. D. M. (2003). Technology shocks matter. Federal Reserve Bank of Chicago, WP-02-14.

Greenwood, J., Hercowitz, Z., and Huffman, G. W. (1988). Investment capacity utilization,and the real business cycle. The American Economic Review, 78:402–417.

Greenwood, J., Hercowitz, Z., and Krusell, P. (1997). Long run implications of investment-specific technological change. The American Economic Review, 87:342–362.

Greenwood, J., Hercowitz, Z., and Krusell, P. (2000). The role of investment-specific technological change in the business cycle. The European Economic Review, 44:91–115.

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. Macmillan, London.

Letendre, M.-A. (2004). Capital utilization and habit formation in a small open economy. The Canadian Journal of Economics, 37:721–741.

Letendre, M.-A. and Luo, D. (2005). Investment-specific shocks and external balances in a small open economy model. McMaster University, Mimeo.

Mendoza, E. G. (1991). Real business cycles in small open economy. The American Economic Review, 81:797–818.

Obstfeld, M. and Rogoff, K. (1996). Foundations of International Economics. MIT Press, Cambridge.

Schmitt-Groh´e, S. and Uribe, M. (2003). Closing the small open economy model. Journal of International Economics, 61:163–185.