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The New Investment Theory and Aggregate Dynamics

  • Leif Danziger

    (York University)

This paper develops a dynamic general-equilibrium model of capital adjustments under monopolistic competition. Investments are partially irreversible. The model includes microfoundations for consumption decisions and capital-adjustment strategies. The effects of the model parameters on the optimal capital-adjustment strategy are determined analytically. A major result is that the aggregate net investment is proportional to the difference between the desired and previous aggregate capital. The speed of adjustment decreases with the cost of reversibility, is invariant to the shares of labor and capital, and increases with the level of macroeconomic uncertainty. However, the latter effect is not quantitatively important. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/S1094-2025(03)00029-2
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 6 (2003)
Issue (Month): 4 (October)
Pages: 907-940

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Handle: RePEc:red:issued:v:6:y:2003:i:4:p:907-940
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  1. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  2. Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," NBER Working Papers 5260, National Bureau of Economic Research, Inc.
  4. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  5. Leif Danziger, 1998. "A Dynamic Economy with Costly Price Adjustment," Cahiers de recherche CREFE / CREFE Working Papers 83, CREFE, Université du Québec à Montréal.
  6. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc.
  7. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  8. John V. Leahy, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 1105-1133.
  9. Caballero, Ricardo J & Pindyck, Robert S, 1996. "Uncertainty, Investment, and Industry Evolution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 641-62, August.
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  12. Russell Cooper & John Haltiwanger, 1990. "The Aggregate Implications of Machine Replacement: Theory and Evidence," NBER Working Papers 3552, National Bureau of Economic Research, Inc.
  13. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
  14. Marcelo L. Veracierto, 2002. "Plant-Level Irreversible Investment and Equilibrium Business Cycles," American Economic Review, American Economic Association, vol. 92(1), pages 181-197, March.
  15. Pulvino, Todd C., 1999. "Effects of bankruptcy court protection on asset sales," Journal of Financial Economics, Elsevier, vol. 52(2), pages 151-186, May.
  16. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
  17. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
  18. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  19. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  20. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June.
  21. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
  22. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
  23. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 581-593.
  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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