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Nonlinear Aggregate Investment Dynamics: Theory and Evidence

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  • Ricardo J. Caballero

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 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, we 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 98-1.

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Date of creation: Jan 1998
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Handle: RePEc:mit:worpap:98-1

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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References

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  1. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  2. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  3. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 360-82, June.
  4. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 359-83, May.
  5. Janice C. Eberly, . "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 22-91, Wharton School Rodney L. White Center for Financial Research.
  6. Peter K. Clark, 1993. "Tax Incentives and Equipment Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 317-347.
  7. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
  8. Sanford J. Grossman & Guy Laroque, 1987. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
  9. 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.
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Cited by:
  1. Gopinath, Gita, 2003. "Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics," Scholarly Articles 11988005, Harvard University Department of Economics.
  2. Lars Jonung, 2005. "Proceedings of the 2004 first annual DG ECFIN research conference on “Business Cycles and Growth in Europeâ€," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 227, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc.
  4. Francois, P. & Lloyd-Ellis, H., 2003. "Co-movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction," Discussion Paper, Tilburg University, Center for Economic Research 2003-62, Tilburg University, Center for Economic Research.
  5. Bayraktar, Nihal & Sakellaris, Plutarchos & Vermeulen, Philip, 2005. "Real versus financial frictions to capital investment," Working Paper Series, European Central Bank 0566, European Central Bank.
  6. Anne Epaulard, 2001. "À la recherche des déterminants de l'investissement des entreprises," Économie et Statistique, Programme National Persée, Programme National Persée, vol. 341(1), pages 3-14.
  7. Ngongang, Elie, 2011. "Impact of Exchange Rate Policy on the Trade of Industrial Products in Sub-Saharan Africa from 1975 to 2007," Review of Applied Economics, Review of Applied Economics, Review of Applied Economics, vol. 7(1-2).

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