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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.

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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 07-08.

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Length: 32 pages
Date of creation: May 2007
Date of revision: Dec 2010
Publication status: Published: Revised version in Journal of Money, Credit and Banking, Vol. 42, No. 8 (December 2010), pp. 1469–1494
Handle: RePEc:car:carecp:07-08

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Keywords: Investment adjustment costs; capital adjustment cost;

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  1. Simon Gilchrist & Fabio M. Natalucci & Egon Zakrajsek, 2007. "Investment and the Cost of Capital: New Evidence from the Corporate Bond Market," Boston University - Department of Economics - Working Papers Series WP2007-027, Boston University - Department of Economics.
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Cited by:
  1. Majuca, Ruperto P., 2011. "An Estimated (Closed Economy) Dynamic Stochastic General Equilibrium Model for the Philippines: Are There Credibility Gains from Committing to an Inflation Targeting Rule?," Discussion Papers DP 2011-04, Philippine Institute for Development Studies.
  2. Janice C. Eberly & Sergio Rebelo & Nicolas Vincent, 2011. "What Explains the Lagged Investment Effect?," NBER Working Papers 16889, National Bureau of Economic Research, Inc.
  3. Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.
  4. Dave, Chetan & Dressler, Scott J., 2010. "Technology shocks, capital utilization and sticky prices," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2179-2191, October.
  5. Nazim Belhocine, 2009. "The Stock of Intangible Capital in Canada," IMF Working Papers 09/250, International Monetary Fund.
  6. Fiori, Giuseppe, 2012. "Lumpiness, capital adjustment costs and investment dynamics," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 381-392.
  7. Leonardo Auernheimer & Danilo Trupkin, 2013. "Online Appendix to "The role of inventories and capacity utilization as shock absorbers"," Technical Appendices 12-159, Review of Economic Dynamics.

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