Investment shocks and macroeconomic co-movement

•MEI shocks do not generate co-movement between consumption and investment in standard models.•This is a problem given the conditional and unconditional empirical evidence.•Rule-of-thumb consumers help generating macroeconomic co-movement in response to MEI shocks.•Previous literature has shown that non-separable preferences can achieve the same result.•Under sticky wages it is possible to disentangle these two plausible and non-rival mechanisms.

Recent studies find that shocks to the marginal efficiency of investment are main drivers of business cycles. However, they struggle to explain why consumption co-moves with key real variables such as investment and output. In this paper, we show that, within a conventional business cycle model, rule-of-thumb consumption provides a straightforward explanation of macroeconomic co-movement after a shock to the marginal efficiency of investment.