Alessandro Mennuni (University of Southampton)
Paper: 1407
The vast majority of the business cycle literature assumes a linear transformation frontier between consumption and investment goods. This assumption neglects a relationship, present in the data, between the relative demand of consumption and investment, and its relative price. This assumption also leads to counterfactual saving rates. A simple extension of the real business cycle model is proposed where the transformation frontier can be concave. Alternative identication strategies lead to the estimation of a concave frontier, with a dramatic improvement of the prediction of the saving rate.