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Nonlinear Aggregate Investment Dynamics: Theory and Evidence

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  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6420.

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Date of creation: Feb 1998
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Handle: RePEc:nbr:nberwo:6420

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  1. Russell Cooper & John Haltiwanger, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," NBER Working Papers 3552, National Bureau of Economic Research, Inc.
  2. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Adjustment Hazards and Aggregate Dynamics," NBER Working Papers 4090, National Bureau of Economic Research, Inc.
  3. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  4. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  5. 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.
  6. Eberly, J.C., 1990. "Adjustment of Consumers'durables Stocks: Evidence from Automobile Purchases," Weiss Center Working Papers 22-91, Wharton School - Weiss Center for International Financial Research.
  7. 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.
  8. 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.
  9. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
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Cited by:
  1. 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.
  2. 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.
  3. 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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