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Lumpy Investment in Dynamic General Equilibrium

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Abstract

Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment.

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  • Ruediger Bachmann & Ricardo J. Caballero & Eduardo Engel, 2006. "Lumpy Investment in Dynamic General Equilibrium," Cowles Foundation Discussion Papers 1566, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1566
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    1. Asdrubali, Pierfederico & Kim, Soyoung, 2009. "Consumption smoothing channels in open economies," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2293-2300, December.
    2. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, March.
    3. Sveen, Tommy & Weinke, Lutz, 2007. "Lumpy investment, sticky prices, and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 23-36, September.
    4. Francois Gourio, 2007. "Disasters and Recoveries: A Note on the Barro-Rietz Explanation of the Equity Premium Puzzle," Boston University - Department of Economics - Working Papers Series WP2007-007, Boston University - Department of Economics.
    5. Gourio, Francois & Kashyap, Anil K, 2007. "Investment spikes: New facts and a general equilibrium exploration," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 1-22, September.
    6. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
    7. Palguta, Ján, 2019. "Political representation and public contracting: Evidence from municipal legislatures," European Economic Review, Elsevier, vol. 118(C), pages 411-431.
    8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    9. Jianjun Miao, 2019. "Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 67-101, May.
    10. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    11. Jack Favilukis & Xiaoji Lin, 2011. "Micro Frictions, Asset Pricing and Aggregate," FMG Discussion Papers dp673, Financial Markets Group.
    12. Shuyun Li, 2011. "Costly external finance, reallocation, and aggregate productivity," Journal of Productivity Analysis, Springer, vol. 35(3), pages 181-195, June.
    13. Daniele Girardi, 2017. "Old and new formulations of the neoclassical theory of aggregate investment : a critical review," UMASS Amherst Economics Working Papers 2017-03, University of Massachusetts Amherst, Department of Economics.

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    More about this item

    Keywords

    Ss model; RBC model; Time-varying impulse response function; Aggregate shocks; Sectoral shocks; Idiosyncratic shocks; Adjustment costs; History dependence; Moment matching;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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