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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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  29. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.
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Cited by:
  1. Verona, Fabio, 2012. "Lumpy investment in sticky information general equilibrium," IMFS Working Paper Series 55, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  2. Fabio Verona & Maik Wolters, 2014. "Sticky Information Models in Dynare," Computational Economics, Society for Computational Economics, vol. 43(3), pages 357-370, March.
  3. Verona, Fabio, 2013. "Investment dynamics with information costs," Research Discussion Papers 18/2013, Bank of Finland.

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