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Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs

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  • Pengfei Wang
  • Yi Wen

Abstract

Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin?s Q and plant-level investment. Although aggregate adjustment cost functions can be derived from microfoundations, they are subject to the Lucas critique because parameters in such functions may not be structural and policy invariant.

Suggested Citation

  • Pengfei Wang & Yi Wen, 2010. "Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs," Working Papers 2010-037, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2010-037
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Hayashi meets Kiyotaki and Moore: a theory of capital adjustment costs
      by Christian Zimmermann in NEP-DGE blog on 2010-11-17 04:43:06

    Citations

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    Cited by:

    1. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(3Q), pages 209-254.
    2. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
    3. Pengfei Wang & Yi Wen, 2012. "Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 207-225, April.
    4. Zhiwei Xu & Yi Wen & pengfei Wang, 2012. "When Do Inventories Destabilize the Economy? ---A Tractable Approach to (S,s) Policies," 2012 Meeting Papers 288, Society for Economic Dynamics.
    5. Osti, Davide, 2015. "An open economy New-Keynesian model of government spending across U.S. regions," MPRA Paper 79895, University Library of Munich, Germany.

    More about this item

    Keywords

    Capital investments; Tobin's q;

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