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Lumpy investment in sticky information general equilibrium

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  • Verona, Fabio

    ()
    (Bank of Finland Research)

Abstract

In this paper, I introduce lumpy micro-level capital adjustment into a sticky information general equilibrium model. Lumpy adjustment arises because of inattentiveness in capital investment decisions instead of the more common assumption of non-convex adjustment costs. The model features inattentiveness as the only source of stickiness. I find that the model with lumpy investment yields business cycle dynamics which differ substantially from those of an otherwise identical model with frictionless investment and are much more consistent with the empirical evidence. These results therefore strengthen the case in favour of the relevance of microeconomic investment lumpiness for the business cycle.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1316.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 16/2013.

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Length: 37 pages
Date of creation: 17 Aug 2013
Date of revision:
Handle: RePEc:hhs:bofrdp:2013_016

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: sticky information; general equilibrium; lumpy investment; business cycle;

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References

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  1. Fiori, Giuseppe, 2012. "Lumpiness, capital adjustment costs and investment dynamics," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 381-392.
  2. Ruediger Bachmann & Ricardo J. Caballero & Eduardo Engel, 2008. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," Cowles Foundation Discussion Papers 1566R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2010.
  3. Jordi Galí, 2008. "Monetary Policy and the Open Economy
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  14. Verona, Fabio & Wolters, Maik H., 2013. "Sticky information models in Dynare," Research Discussion Papers 5/2013, Bank of Finland.
  15. Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series 1331, European Central Bank.
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  19. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
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  22. Julia K. Thomas, 2002. "Is lumpy investment relevant for the business cycle?," Staff Report 302, Federal Reserve Bank of Minneapolis.
  23. Verona, Fabio, 2013. "Lumpy investment in sticky information general equilibrium," Research Discussion Papers 16/2013, Bank of Finland.
  24. N. Gregory Mankiw & Ricardo Reis, 2007. "Sticky Information in General Equilibrium," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 603-613, 04-05.
  25. repec:nbr:nberwo:14732 is not listed on IDEAS
  26. Francois Gourio & Anil K Kashyap, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," NBER Working Papers 13157, National Bureau of Economic Research, Inc.
  27. Joanne M. Doyle & Toni M. Whited, 2001. "Fixed Costs Of Adjustment, Coordination, And Industry Investment," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 628-637, November.
  28. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," Papers 0062, Boston University - Industry Studies Programme.
  29. Marcelo Veracierto, 1997. "Plant level irreversible investment and equilibrium business cycles," Discussion Paper / Institute for Empirical Macroeconomics 115, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Verona, Fabio & Wolters, Maik H., 2013. "Sticky information models in Dynare," Economics Working Papers 2013-02, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
  3. Fabio Verona, 2011. "Lumpy investment in sticky information general equilibrium," CEF.UP Working Papers 1102, Universidade do Porto, Faculdade de Economia do Porto.

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