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Is Lumpy Investment Relevant for the Business Cycle?

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  • Julia K. Thomas

Abstract

This paper examines the importance of establishment-level discrete and occasional capital adjustments for aggregate business cycle dynamics. Generalized (S,s) investment rules arise through nonconvex costs of capital adjustment within an otherwise standard equilibrium business cycle model, and the model is calibrated using data on establishment-level investment patterns. The effects of lumpy investment are shown to be secondary to the convexifying force of general equilibrium. Specifically, adjustments in wages and interest rates yield quantity dynamics that are virtually indistinguishable from the standard model.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 1998-E250.

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Handle: RePEc:cmu:gsiawp:405

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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  1. Marcelo Veracierto, 1997. "Plant level irreversible investment and equilibrium business cycles," Discussion Paper / Institute for Empirical Macroeconomics 115, Federal Reserve Bank of Minneapolis.
  2. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Working Papers 5546, National Bureau of Economic Research, Inc.
  3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  4. Jonas D.M. Fisher & Andreas Hornstein, 1998. "(S,s) Inventory policies in general equilibrium," Working Paper 97-07, Federal Reserve Bank of Richmond.
  5. Caballero, R.J. & Engel, E.M.R.A., 1990. "Dynamic (S,S) Economies," Discussion Papers 1990_44, Columbia University, Department of Economics.
  6. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
  7. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  8. Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Discussion Papers 1992_15, Columbia University, Department of Economics.
  9. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
  10. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  11. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  12. Kevin A. Hassett, 2009. "Tax Policy and Investment," Books, American Enterprise Institute, number 24215, 9.
  13. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  14. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  15. Ricardo J. Caballero & John V. Leahy, 1996. "Fixed Costs: The Demise of Marginal q," NBER Working Papers 5508, National Bureau of Economic Research, Inc.
  16. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  17. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
  18. James H. Stock & Mark W. Watson, 1998. "Business Cycle Fluctuations in U.S. Macroeconomic Time Series," NBER Working Papers 6528, National Bureau of Economic Research, Inc.
  19. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  20. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  21. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  22. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
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