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Modeling aggregate investment: a fundamentalist approach

  • John M. Roberts

This paper applies some lessons from recent estimation of investment models with firm-level data to the aggregate data with an eye to rehabilitating convex costs of adjusting the capital stock. In recent firm-level work, the response of investment to output and other "fundamental" variables is interpreted in terms of the traditional convex-adjustment-cost model, implying annual capital-stock adjustment speeds on the order of 15 to 35 percent. In aggregate data, I find that this "fundamentalist" model can account for the reduced-form effect of output on investment and the estimated capital-stock adjustment speed is similar to those from firm-level studies B--around 25 percent per year. To account for the slower adjustment to changes in the cost of capital, I consider a model in which the capital-intensity of production is also costly to adjust. I find that this model can account for the reduced-form effects of both output and the cost of capital on investment.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-48.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedgfe:2003-48
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  1. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  2. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-26, August.
  3. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  5. Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
  6. Lichtenberg, Frank R, 1988. "Estimation of the Internal Adjustment Costs Model Using Longitudinal Establishment Data," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 421-30, August.
  7. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Working Papers 5546, National Bureau of Economic Research, Inc.
  8. John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
  9. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  10. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
  11. repec:oup:qjecon:v:101:y:1986:i:3:p:513-42 is not listed on IDEAS
  12. William B. English & William R. Nelson & Brian P. Sack, 2002. "Interpreting the significance of lagged interest rate in estimated monetary policy rules," Finance and Economics Discussion Series 2002-24, Board of Governors of the Federal Reserve System (U.S.).
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