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Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model

  • R?diger Bachmann
  • Ricardo J. Caballero
  • Eduardo M. R. A. Engel

The sensitivity of US aggregate investment to shocks is procyclical. The response upon impact increases by approximately 50 percent from the trough to the peak of the business cycle. This feature of the data follows naturally from a DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis.

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 5 (2013)
Issue (Month): 4 (October)
Pages: 29-67

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Handle: RePEc:aea:aejmac:v:5:y:2013:i:4:p:29-67
Note: DOI: 10.1257/mac.5.4.29
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
  2. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  3. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
  4. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Hansen, Lars Peter & Singleton, Kenneth J, 1996. "Efficient Estimation of Linear Asset-Pricing Models with Moving Average Errors," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 53-68, January.
  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  7. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
  8. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  9. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Rigidities and Aggregate Price Dynamics," NBER Working Papers 4162, National Bureau of Economic Research, Inc.
  10. Francois Gourio & Anil K Kashyap, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," NBER Working Papers 13157, National Bureau of Economic Research, Inc.
  11. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity, Portfolio Choice, and Equilibrium Asset Returns," GSIA Working Papers 1997-45, Carnegie Mellon University, Tepper School of Business.
  12. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-86, November.
  13. Aubhik Khan & Julia Thomas, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," Staff Report 352, Federal Reserve Bank of Minneapolis.
  14. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  15. Aubhik Khan & Julia K. Thomas, 2000. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Working Papers 00-10, Federal Reserve Bank of Philadelphia.
  16. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
  17. 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.
  18. Marcelo Veracierto, 1997. "Plant level irreversible investment and equilibrium business cycles," Discussion Paper / Institute for Empirical Macroeconomics 115, Federal Reserve Bank of Minneapolis.
  19. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  20. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  21. repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
  22. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," Working Papers 952, Economic Growth Center, Yale University.
  23. Ellen R. McGrattan & James A. Schmitz, Jr., 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  24. 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.
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