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Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs

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  • Pengfei Wang
  • Yi Wen

Abstract

Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin’s Q and plant-level investment. Although aggregate adjustment cost functions can be derived from microfoundations, they are subject to the Lucas critique because parameters in such functions may not be structural and policy invariant.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-037.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-037

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Keywords: Capital investments ; Tobin's q;

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  1. Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs
    by Christian Zimmermann in NEP-DGE blog on 2010-11-16 22:43:06
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Cited by:
  1. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  2. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.

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