That should have produced a boom in investment, which seems not to have happened. This shock computes the magnitude of this “missing effect” by simulating the effect of an increase in the financial cost of capital. RPD affects the user cost of capital for the model’s four investment categories: equipment, intellectual property, nonresidential structures and inventories.
Those, in turn, influence target rates of investment, all else equal. The shock lasts for 20 years before fading out at a moderate pace. Foreign interest rates. The equilibrium real interest rate in (trade-weighted) foreign economies (FRSTAR) is assumed to decline by 1 percentage point for an indefinite period.