Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model
Is the relative price of investment goods a good proxy for investment frictions? We analyze investment frictions in an open economy, flexible price, two-country model and show that when the relative price of investment goods is endogenously determined in such a model, the relative price of investment can actually rise in response to a reduction in investment frictions. Only when the model is driven by TFP shocks do we observe a data congruent negative correlation between investment and the relative price of investment goods.
Investment frictions, investment specific technological progress, total factor productivity, relative price of investment goods terms of trade.
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