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

Author

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  • Thomas, J.K.

Abstract

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.

Suggested Citation

  • Thomas, J.K., 1999. "Lumpy Investment, Partial Adjustment and the Business Cycle: A Reconciliation," GSIA Working Papers 1999-25, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1999-25
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    Citations

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    Cited by:

    1. Khan, Aubhik & Thomas, Julia K., 2003. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 331-360, March.
    2. 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.
    3. Øivind Anti Nilsen & Fabio Schiantarelli, 2003. "Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1021-1037, November.

    More about this item

    Keywords

    INVESTMENTS ; BUSINESS CYCLES;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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