The Impact Effects of Investment-Specific Technology Shocks in a Small Open Economy: Value Function Iteration Approach

This paper examines the impact eect on business cycles of in-vestment specic technology shocks in a small open economy.Our model is solved qualitatively and simulated by value func-tion iteration and transition probability iteration method. Ourpaper supports Keynes’ view that shocks to the marginal e-ciency of investment is important for business uctuations. Ourmodel is able to duplicate many of the stylized facts of business cy-cles in Korea. Theoretical and quantitative analyses uggest thatinvestment-specic technology shock provide a meaningful expla-nation to Korean economic uctuations. The shock has positiveeects on macroeconomic variables except for trade balance. KCI Citation Count: 2