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Is Lumpy Investment Relevant for the Business Cycle?

Listed author(s):
  • Julia K. Thomas

This paper examines the importance of establishment-level discrete and occasional capital adjustments for aggregate business cycle dynamics. Generalized (S,s) investment rules arise through nonconvex costs of capital adjustment within an otherwise standard equilibrium business cycle model, and the model is calibrated using data on establishment-level investment patterns. The effects of lumpy investment are shown to be secondary to the convexifying force of general equilibrium. Specifically, adjustments in wages and interest rates yield quantity dynamics that are virtually indistinguishable from the standard model.

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File URL: http://www.tepper.cmu.edu/andrew/jkt/www/ThomasAug00.pdf
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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 1998-E250.

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Handle: RePEc:cmu:gsiawp:405
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Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890

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  17. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  18. Caplin, A. & Leahy, J., 1992. "Aggregation and Optimization with State-Dependent Pricing," Harvard Institute of Economic Research Working Papers 1595, Harvard - Institute of Economic Research.
  19. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049.
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  22. 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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