Abstract
This paper explains the observed cyclical variability of aggregate investment and the counter movements with respect to its relative price in the US data using a stochastic growth model with adjustment costs. The exogenous disturbances of the model represent preference shocks, productivity innovations and changes on the relative price between consumption and investment goods. Simulations of the model imply that the volatility of those relative price innovations need to be three to four times larger than the standard Solow residual innovations in order to match the model with the data.
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