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Nonconvex factor adjustments in equilibrium business cycle models: Do nonlinearities matter?

Author

Listed:
  • Aubhik Khan
  • Julia K. Thomas

Abstract

Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.

Suggested Citation

  • Aubhik Khan & Julia K. Thomas, . "Nonconvex factor adjustments in equilibrium business cycle models: Do nonlinearities matter?," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:306
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    References listed on IDEAS

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    Cited by:

    1. Aubhik Khan & Julia K. Thomas, 2007. "Inventories and the Business Cycle: An Equilibrium Analysis of ( S , s ) Policies," American Economic Review, American Economic Association, vol. 97(4), pages 1165-1188, September.
    2. Del Boca, Alessandra & Galeotti, Marzio & Rota, Paola, 2008. "Non-convexities in the adjustment of different capital inputs: A firm-level investigation," European Economic Review, Elsevier, vol. 52(2), pages 315-337, February.
    3. Yi Wen, 2007. "Production and Inventory Behavior of Capital," Annals of Economics and Finance, Society for AEF, vol. 8(1), pages 95-112, May.
    4. Edward C. Prescott, 2003. "Non-convexities in quantitative general equilibrium studies of business cycles," Staff Report, Federal Reserve Bank of Minneapolis.
    5. Wen, Yi, 2004. "General Equilibrium Analysis of the Supply of Capital," Working Papers 04-02, Cornell University, Center for Analytic Economics.

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