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Friday, August 7, 2020 | History

2 edition of Productivity shocks, investment, and the real interest rate found in the catalog.

Productivity shocks, investment, and the real interest rate

Giovanni P. Olivei

Productivity shocks, investment, and the real interest rate

by Giovanni P. Olivei

  • 175 Want to read
  • 16 Currently reading

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.

  • 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

    A. a real shock only affects the real interest rate, while a nominal shock affects the nominal interest rate. B. a real shock is a disturbance to the real side of the economy that affects the IS curve or the FE line, while a nominal shock is a disturbance to money supply or . A beneficial productivity shock would _____ output, _____ the real interest rate, and _____ the price level. increase; decrease; decrease An adverse supply shock would directly _____ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor.

    real (not nominal) shocks - mostly fluctuations in productivity growth, but also fluctuations in government purchases, import prices, or pref-erences. The “RBC” methodology also comes down to two principles: 1. The economy should always be modeled using dynamic general equi-librium models (with rational expectations). 2. • Only productivity shocks are considered. But other shocks are known to be important drivers of business cycles in EM (e.g., interest-rate shocks). • The model is estimated using short data samples (e.g., in the Aguiar-Gopinath study). This is particularly prob-lematic if the theory predicts that movements in the trend are.

    I found that both productivity shocks and shocks to a country’s risk premium affect exchange rates and a 1 percentage point increase in the policy interest rate is associated with a 1 percentage point appreciation of domestic currency. I further apply this method to Asian and Latin-American crises. In standard models, when all is said and done, much of the macroeconomic adjustment—investment and consumption, in particular—occurs via interest rate movements. Reductions in consumption coming from a negative wealth effect push down interest rates, thus reducing the strength of .


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Productivity shocks, investment, and the real interest rate by Giovanni P. Olivei Download PDF EPUB FB2

Productivity Shocks, Investment, and the Real Interest Rate. By Giovanni P. Olivei. Full Text Document (pdf) 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. Additional Physical Format: Online version: Olivei, Giovanni P., Productivity shocks, investment, and the real interest rate.

Boston: Federal Reserve Bank of. 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 and the real interest rate book 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.

liquidity trap { a preference shock that depresses the natural real interest rate { and on the characteristics of the foreign demand shock. The efiects of a foreign shock on domestic GDP are linear provided that the size of the shock is small. However, if foreign shocks are large enough to afiect the duration of the liquidity trap, their.

Downloadable. We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination.

A demand shock is a sudden change of the pattern of private expenditure, especially of consumption spending by consumers or of investment spending by businesses. A monetary policy shock occurs when a central bank changes, without sufficient advance warning, its pattern of interest rate or money supply control.

A fiscal policy shock is an unexpected change of government spending or taxation. Economic Shock: An economic shock is an event that occurs outside of an economy, and produces a significant change within an economy.

The real interest rate. At lower rates of interest, firms will invest more since borrowing costs will be lower. Corporate taxes lower the after-tax return from investment and reduce the amount of investment.

Investment function relates investment (negatively) to the level of the real interest rate. Investment shocks do not affect all firms equally in the cross section. A positive investment shock benefits firms producing investment goods relative to firms producing consumption goods.

Furthermore, a positive investment shock increases the value of investment opportunities rela-tive to the value of existing assets in each sector. A combined low interest rate and low productivity growth environment can be explained by a weak cleansing mechanism, in which low interest rates support the survival of weakly profitable firms and investment projects.

And so the decrease in real interest rates since the early s can help to explain the slowdown in productivity over that period.• Shocks, so uncertainty. (Much of what happens is unexpected).

Natural shocks if we want to get good times, bad times: Productivity shocks. Why not taste (discount rate) shocks? • Basic intertemporal choice: Consumption/saving Natural choice. Ramsey model, add technological shocks, and by implication uncertainty. A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price.

Supply shocks can be negative, resulting in a.