This paper builds a stochastic growth model with multiple-product firms to explain the positive comovement of business investment and household investment in US macroeconomic data. In contract to the standard RBC model, our model generates positive comovement between business investment and household investment after a positive technology shock. The model produces a natural complementarity among different sectors when firms are allowed to produce multiple products, which dampens the crowding-out effect between these two types of investment and hence generates the positive comovement. This paper further shows that introducing housing demand shock can qualitatively solve the lead-lag relationship between these two types of investment, which is another long standing puzzle in the RBC lite...[ Read more ]

This paper builds a stochastic growth model with multiple-product firms to explain the positive comovement of business investment and household investment in US macroeconomic data. In contract to the standard RBC model, our model generates positive comovement between business investment and household investment after a positive technology shock. The model produces a natural complementarity among different sectors when firms are allowed to produce multiple products, which dampens the crowding-out effect between these two types of investment and hence generates the positive comovement. This paper further shows that introducing housing demand shock can qualitatively solve the lead-lag relationship between these two types of investment, which is another long standing puzzle in the RBC literature.