ESSAY ON INVESTMENT AND THE ELASTICITY OF SUBSTITUTION

Standard models used to analyze business-cycle fluctuations rely on the Cobb-Douglas production function. In their paper, Cantore et al. (2015) (CLPY in the following) analyze if and to what extent the use of a Constant Elasticity of Substitution (CES) production function improves a standard medium-size Dynamic Stochastic General Equilibrium (DSGE) model. Extending a model similar to Christiano et al. (2005) and Smets and Wouters (2007) with the CES production function, they show that allowing for non-unitary elasticity of substitution (i.e., non-Cobb-Douglas production function) between inputs has a significant improvement in terms of second moments and posterior marginal likelihood. Our research builds upon the results of CLPY and is carried out in two chapters, each inspecting the implications of CES production function on a different definition of investment; in particular, the first chapter considers investment in physical capital, the second investment in firm creation.