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

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  • Aubhik Khan
  • Julia K. Thomas

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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Bibliographic Info

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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  1. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  2. Aubhik Khan & Julia K. Thomas, . "Nonconvex Factor Adjustments in Equilibrium Business Cycle Models: Do Nonlinearities Matter?," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2000-E33, Carnegie Mellon University, Tepper School of Business.
  3. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
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  14. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1998-E250, Carnegie Mellon University, Tepper School of Business.
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  24. repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
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