Investment-Specific Technological Progress: The Perspective of Capital Owners

Abstract

This study highlights the importance of investment-specific technological (IST) progress in affecting the business cycle, which is identified by properly specifying shock propagation mechanisms. IST progress differentiates the value of investment goods across different vintages, which raises payouts from new investments while inducing capital losses of older investment goods. I develop a DSGE model that focuses on asset valuation by capital owners, considering their net wealth. The study shows that an IST shock raises investment and output significantly in contrast to the existing studies that estimate DSGE models. When associated with other shocks related to financial market mechanisms, the IST shock accounts for approximately 35% of output fluctuations. These findings are similar to those reported in the studies that adopted less stringent shock propagation mechanisms such as structural VAR models. These findings can provide a way to reconcile the significantly different results reported in the literature until date.