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The University of Southampton
EconomicsPart of Economic, Social and Political Science

1407 The Role of Curvature in the Transformation Frontier between Consumption and Investment (A. Mennuni)

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.

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