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Investment Adjustment Costs: An Empirical Assessment

  • CHARLOTTA GROTH
  • HASHMAT KHAN

We evaluate empirical evidence for costs that penalize changes in investment using US industry data. In aggregate models, such investment adjustment costs have been introduced to help account for a variety of business cycle and asset market phenomena. We consider a general adjustment cost structure which nests both investment adjustment costs and the traditional capital adjustment costs as special cases. The estimated weight on the former is close to zero for all the industries. When only the investment adjustment cost structure is considered, the estimates of the adjustment cost parameter imply an elasticity of investment with respect to the shadow price of capital fifteen times larger than estimates based on aggregate data. Our results suggest that from a disaggregated empirical perspective it remains di±cult to motivate and interpret the investment friction considered in recent macroeconomic models.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 42 (2010)
Issue (Month): 8 (December)
Pages: 1469-1494

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Handle: RePEc:mcb:jmoncb:v:42:y:2010:i:8:p:1469-1494
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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