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Costs of Adjustment, the Aggregation Problem and Investment

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  • Gordon, Stephen

Abstract

This paper looks at the empirical consequences of inappropriately using a representative firm to mimic the aggregate investment decisions of a group of heterogeneous firms faced with costs of adjusting capital inputs. Improper aggregation generates a bias with two important consequences: (1) an apparent insensitivity of the aggregate capital stock to the user cost of capital and (2) predicted responses of the capital stock to shocks that are considerably slower than observed. Both of these consequences are features of available investment equations. Copyright 1992 by MIT Press.

Suggested Citation

  • Gordon, Stephen, 1992. "Costs of Adjustment, the Aggregation Problem and Investment," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 422-429, August.
  • Handle: RePEc:tpr:restat:v:74:y:1992:i:3:p:422-29
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    References listed on IDEAS

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    1. N/A, 1985. "Asia," India Quarterly: A Journal of International Affairs, , vol. 41(1), pages 80-87, January.
    2. Evenson, Robert E & Kislev, Yoav, 1973. "Research and Productivity in Wheat and Maize," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1309-1329, Nov.-Dec..
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    Cited by:

    1. Charlotta Groth & Hashmat Khan, 2010. "Investment Adjustment Costs: An Empirical Assessment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1469-1494, December.
    2. Lubomir Lizal, 1999. "Does a Soft Macroeconomic Environment Induce Restructuring on the Microeconomic Level during the Transition Period? Evidence from Investment Behavior of Czech Enterprises," William Davidson Institute Working Papers Series 235, William Davidson Institute at the University of Michigan.
    3. Yuriy Gorodnichenko, 2007. "Using Firm Optimization to Evaluate and Estimate Returns to Scale," NBER Working Papers 13666, National Bureau of Economic Research, Inc.
    4. Gordon, Stephen, 1996. "How long is the firm's forecast horizon?," Journal of Economic Dynamics and Control, Elsevier, pages 1145-1176.
    5. George Bitros, 2008. "Why the structure of capital and the useful lives of its components matter: A test based on a model of Austrian descent," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 21(4), pages 301-328, December.
    6. Montgomery, Michael R., 1995. "'Time-to-build' completion patterns for nonresidential structures, 1961-1991," Economics Letters, Elsevier, vol. 48(2), pages 155-163, May.
    7. Varshavsky, Leonid, 2010. "Methodological basis of modeling evolution of markets of products with long life cycle: a study of the civil aircrafts’ market," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 20(4), pages 53-74.
    8. Casalin, Fabrizio & Dia, Enzo, 2014. "Adjustment costs, financial frictions and aggregate investment," Journal of Economics and Business, Elsevier, pages 60-79.

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