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An Optimizing IS-LM Framework with Endogenous Investment

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Author Info
Miguel Casares
Bennett T. McCallum

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Abstract

Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have been used for much recent monetary policy analysis, but usually with capital and investment treated as exogenous a significant restriction. This paper demonstrates that investment decisions can be endogenized without undue complexity in such models and that these can be calibrated to provide reasonably realistic dynamic behavior. It is necessary, however, to include capital adjustment costs; models with no adjustment costs match cyclical data very poorly. Indeed, their match is considerably poorer than models with constant capital. The paper also finds that the preferred adjustment-cost specification is not close to quadratic.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7908.

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Date of creation: Sep 2000
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Handle: RePEc:nbr:nberwo:7908

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E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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This page was last updated on 2008-8-28.

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