An Investigation Into the Relative Price of Investment

Abstract

In this thesis, I examine the conventional assumption of identifying investment-specific technology by the inverse of the relative price of investment. Linking prices to technology in this fashion implies that the relative price is orthogonal to any other form of economic disturbance. However, recent research has found that both neutral technology and the relative price of investment are cointegrated in the postwar US. In the chapters that follow, I explore the impact of this identification by either linking the relative price of investment to total factor productivity, or by allowing this relative price to vary depending on investment demand. In all three chapters, I find that loosening this restriction has a sizable effect on the outcome of my research as it compares to the current literature.