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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, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:19815
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    File URL: https://cepr.org/publications/DP19815
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    Cited by:

    1. is not listed on IDEAS
    2. Julian di Giovanni & Manuel García-Santana & Priit Jeenas & Enrique Moral-Benito & Josep Pijoan-Mas, 2022. "Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy," Staff Reports 1006, Federal Reserve Bank of New York.

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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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