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Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections

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Christian Bayer

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Abstract

In this paper a model of aggregate investment is derived, which incorporates fixed investment costs and capital market imperfections on the micro-level. Aggregate investment reacts nonlinearly with respect to aggregate shocks to productivity and liquidity of firms. Employing nonparamatric kernel estimation methods to analyse a sample of annual account data of UK companies, these nonlinearities also show up empirically. Furthermore a difference in strength between the long- and the short-run effect of liquidity on investment is found, which is inconsistent with models that solely explain the empirical correlation of investment and liquidity as the result of some long-run relationship like liquidity-dependent costs-of-capital or principal-agent problems.

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Paper provided by University of Dortmund, Department of Economics in its series Discussion Papers in Economics with number 01_13.

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Length: 29 pages
Date of creation: Jul 2001
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Handle: RePEc:mik:wpaper:01_13

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  1. Christian Bayer, 2004. "On the Interaction of Financial Frictions and Fixed Capital Adjustment Costs: Evidence from a Panel of German Firms," Macroeconomics 0410006, EconWPA. [Downloadable!]
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