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Investment Adjustment Costs: An Empirical Assessment

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Abstract

We evaluate empirical evidence for costs that penalize changes in investment using US industry data. In aggregate models, such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena. We consider a general adjustment cost structure which nests both investment adjustment costs and the traditional capital adjustment costs as special cases. The estimated weight on the former is close to zero for all the industries. When only the investment adjustment cost structure is considered, the estimates of the adjustment cost parameter imply an elasticity of investment with respect to the shadow price of capital fifteen times larger than estimates based on aggregate data. Our results suggest that from a disaggregated empirical perspective it remains di±cult to motivate and interpret the investment friction considered in recent macroeconomic models.

Suggested Citation

  • Hashmat Khan & Charlotta Groth, 2007. "Investment Adjustment Costs: An Empirical Assessment," Carleton Economic Papers 07-08, Carleton University, Department of Economics, revised Dec 2010.
    • Handle: RePEc:car:carecp:07-08
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    More about this item

    Keywords

    Investment adjustment costs; capital adjustment cost;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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