Investment-specific technology shocks and consumption

Abstract

Modern business cycle models systematically underestimate the correlation between consumption and investment. One reason for this failure is that, generally, positive investment-speciÖc technology shocks induce a negative consumption response. The objective of this paper is to investigate whether a positive consumption response to investment-speciÖc technology shocks can be obtained in a modern business cycle model. We Önd that the answer to this question is yes. With a combination of nominal rigidities and nonseparable preferences, the consumption response is positive for very general parameterisations of the model.