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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, the authors derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard sharp (S, s) bands, firms' adjustment policies take the form of a probability of adjustment (adjustment hazard) that responds smoothly to changes in firms' capacity gap. The model has appealing aggregation properties, and yields nonlinear aggregate time series processes. The passivity of normal times is, occasionally, more than offset by the brisk response to large accumulated shocks. Using within and out-of-sample criteria, the authors find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.

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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. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers, Columbia University, Department of Economics 1990_20, Columbia University, Department of Economics.
  4. repec:fth:coluec:465 is not listed on IDEAS
  5. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 71-75, May.
  6. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 223-46, April.
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