CFCM Seminar: Francois Gourio (Federal Reserve Bank of Chicago)

Capital aggregation and investment prices. How much are investment prices declining?  (with Tom Holden and Matt Rognlie)

Abstract: Not as much as you may think. Investment-specific technological change (ISTC), reflected in the declining price of new investment goods, has been recognized as an important potential driver of economic growth, business cycles, the labor share, and the equilibrium real rate. However, the declines in investment prices are heavily concentrated in a few capital categories, most notably computers, while most categories exhibit little change. How one aggregates these price changes is hence critical to evaluating the aggregate importance of ISTC. We demonstrate theoretically the correct aggregation approach using a standard neoclassical model with multiple capital goods. The correct aggregation depends on the question studied. Second, empirically, we evaluate the quantitative impact of using the correct aggregation procedure. We find that the contribution of ISTC to any of these questions is smaller than if one ignores aggregation issues.