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The Macroeconomics of Irreversibility

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  • Baley, Isaac
  • Blanco, Andres

Abstract

We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation.

Suggested Citation

  • Baley, Isaac & Blanco, Andres, 2024. "The Macroeconomics of Irreversibility," CEPR Discussion Papers 19815, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19815
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    File URL: https://cepr.org/publications/DP19815
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    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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