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Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics

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Author Info
Aubhik Khan
Julia K. Thomas

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Abstract

We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S,s) decision rules with respect to capital; as a result, their individual investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, greatly increase the persistence of aggregate investment rates, yielding a better match with the data. ; In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of capital adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks yields an average distribution of plant investment rates that, in contrast, is largely unaffected by market-clearing movements in real wages and interest rates. Nonetheless, we find that to understand the dynamics of plant-level investment requires general equilibrium analysis.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 04-15.

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Date of creation: 2004
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Handle: RePEc:fip:fedpwp:04-15

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Keywords: Investments ; Productivity;

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References listed on IDEAS
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Full references

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ruediger Bachmann & Ricardo J. Caballero & Eduardo Engel, 2006. "Lumpy Investment in Dynamic General Equilibrium," Cowles Foundation Discussion Papers 1566, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  2. Roberto M. Samaniego, 2008. "Entry, Exit and Investment-Specific Technical Change," PIER Working Paper Archive 08-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  3. Ejarque, Joao & Nilsen, Øivind Anti, 2008. "Identifying Adjustment Costs of Net and Gross Employment Changes," IZA Discussion Papers 3703, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Fang Yao, 2008. "Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles," SFB 649 Discussion Papers SFB649DP2008-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
  6. Stephan Fahr & Fang Yao, 2009. "When does Lumpy Factor Adjustment Matter for Aggregate Dynamics?," Working Paper Series 1016, European Central Bank. [Downloadable!]
  7. Christopher L. House, 2008. "Fixed Costs and Long-Lived Investments," NBER Working Papers 14402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Ruediger Bachmann & Ricardo J. Caballero & Eduardo M.R.A. Engel, 2006. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," NBER Working Papers 12336, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Tommy Sveen & Lutz Weinke, 2005. "Is Lumpy Investment really Irrelevant for the Business Cycle?," Economics Working Papers 869, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  10. Miao, Jianjun & Wang, Pengfei, 2009. "Does Lumy Investment Matter for Business Cycles?," MPRA Paper 14977, University Library of Munich, Germany. [Downloadable!]
  11. Roberto M. Samaniego, 2008. "Entry, Exit and Investment-Specific Technical Change, Second Version," PIER Working Paper Archive 09-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Dec 2008. [Downloadable!]
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