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Lumpy Investment, Partial Adjustment and the Business Cycle: A Reconciliation

Empirical research indicates that distributed lag specifications perform well in describing aggregate investment. Such specifications are typically rationalized through the assumption of convex adjustment costs that imply smooth partial adjustment of capital. However, much of the capital stock adjustment within individual production units is discrete and occasional. Neoclassical models of the business cycle preclude such lumpy factor adjustments. Furthermore, to replicate important volatilities and comovements of investment and output, these models must essentially eliminate convex adjustment costs. This paper uses an equilibrium generalized (S,s) model to reconcile lumpy establishment level investment and aggregate partial adjustment while maintaining business cycle performance. Furthermore, it illustrates the importance of general equilibrium considerations for the timing and magnitude of investment activity in generalized (S,s) models.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 1999-25.

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Length: 48 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:cmu:gsiawp:1999-25
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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