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Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach

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  • Caballero, R.J.

Abstract

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard (S,s) bands, firms' adjustment policies are probabilistc, with a probability of adjusting specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very nonlinear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly nonlinear. Using postwar sectoral U.S. manufacturing equipment and structures investment data, we estimate the aggregate model by maximum likelihood, and find clear evidence supporting the model. For a given sequence of aggregate shocks, the estimated nonlinear model generates briskier expansions and -to a lesser extent- sharper contractions than its linear counterparts. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 94-32.

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Length: 34 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:mit:worpap:94-32

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
Phone: (617) 253-3361
Fax: (617) 253-1330
Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Keywords: investments ; manufacturing industries;

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References

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  1. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
  2. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  3. repec:fth:coluec:465 is not listed on IDEAS
  4. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
  5. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  6. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
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