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Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach

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  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

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Abstract

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard (S,s) bands, firms' adjustment policies are probabilistc, with a probability of adjusting specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very nonlinear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly nonlinear. Using postwar sectoral U.S. manufacturing equipment and structures investment data, we estimate the aggregate model by maximum likelihood, and find clear evidence supporting the model. For a given sequence of aggregate shocks, the estimated nonlinear model generates briskier expansions and -to a lesser extent- sharper contractions than its linear counterparts. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

Suggested Citation

  • Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:12
    as

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    References listed on IDEAS

    as
    1. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
    2. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-384, April.
    3. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    4. Guiseppe Bertola & Ricardo J. Caballero, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 223-246.
    5. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
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    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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