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INVESTMENT IRREVERSIBILITY IN GENERAL EQUILIBRIUM: Capital Accumulation, Interest Rates, and the Risk Premium

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  • Miquel Faig

Abstract

This paper provides a tractable general equilibrium model that can accommodate shocks and irreversibility constraints both at the firm and at the aggregate level. Under realistic conditions, irreversibility not only prevents capital destruction, but it also promotes capital creation. Moreover, irreversibility depresses risk-free rates, especially in booms, and magnifies risk premia, especially in downturns. In addition to the theoretical analysis, two numerical examples illustrate the quantitative effects of investment irreversibility in the face of either large rare depressions or mild frequent recessions.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number faig-97-01.

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Length: 37 pages
Date of creation: 14 May 1997
Date of revision:
Handle: RePEc:tor:tecipa:faig-97-01

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  8. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
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Cited by:
  1. Faig, Miquel & Shum, Pauline, 1999. "Irreversible investment and endogenous financing: An evaluation of the corporate tax effects," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 143-171, February.
  2. Valerie A. Ramey & Matthew D. Shapiro, 1998. "Displaced Capital," NBER Working Papers 6775, National Bureau of Economic Research, Inc.
  3. Miquel Faig & Pauline Shum, 1997. "INVESTMENT IRREVERSIBILITY AND ENDOGENOUS FINANCING: An Evaluation of the Corporate Tax Effects," Working Papers faig-97-02, University of Toronto, Department of Economics.
  4. Marcelo Veracierto, 1997. "Plant level irreversible investment and equilibrium business cycles," Discussion Paper / Institute for Empirical Macroeconomics 115, Federal Reserve Bank of Minneapolis.
  5. Jamet, Stephanie, 2004. "Irreversibility, uncertainty and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1733-1756, July.

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