Nonlinear Aggregate Investment Dynamics: Theory and Evidence
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.Download Info
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6420.Length:
Date of creation: Feb 1998
Date of revision:
Handle: RePEc:nbr:nberwo:6420
Note: EFG
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Keywords:Other versions of this item:
- Ricardo J. Caballero, 1998. "Nonlinear Aggregate Investment Dynamics: Theory and Evidence," Working papers 98-1, Massachusetts Institute of Technology (MIT), Department of Economics.
- Ricardo D. Caballero & Eduardo Engel, 1998. "Nonlinear Aggregate Investment Dynamics: Theory and Evidence," Documentos de Trabajo 48, Centro de Economía Aplicada, Universidad de Chile.
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
References
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Simon Gilchrist & Charles Himmelberg, 1999.
"Investment: Fundamentals and Finance,"
NBER Chapters,
in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274
National Bureau of Economic Research, Inc.
- Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc.
- Anne Epaulard, 2001. "À la recherche des déterminants de l'investissement des entreprises," Économie et Statistique, Programme National Persée, vol. 341(1), pages 3-14.
- Nihal Bayraktar & Plutarchos Sakellaris & Philip Vermeulen, 2005. "Real versus financial frictions to capital investment," Working Paper Series 566, European Central Bank.
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