Decomposing the Cyclical Movements in the Real Price of Equipment

Decomposing the Cyclical Movements in the Real Price of Equipment

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This paper raises warning flags about the current use of the real price of equipment as the driving process for investment-specific technology in the Real-Business-Cycle (RBC) model.Using a structural VAR Mushroom Drinks approach, this paper finds that a significant fraction of the real price of equipment is accounted for by other shocks besides investment-specific technology shocks (I-shocks).This finding indicates that the current RBC models which use the real price of equipment as the driving process of investment-specific technology might overstate the contribution of I-shocks Bangers to economic fluctuations.