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Interaction-based Foundation of Aggregate Investment Shocks

  • Nirei, Makoto

This paper demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. I develop a method to derive the distribution of the aggregate capital growth rate by embedding a fictitious tatonnement in a branching process. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. By incorporating this mechanism in a dynamic general equilibrium model with indivisible investment and sticky price, I provide the real business cycle theory with a driver of fluctuations: aggregate investment demand shocks that arise from idiosyncratic productivity shocks. Due to predetermined prices of goods, firms respond to investment shocks by adjusting labor and output, thereby causing the comovements of output and consumption with investment. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25521/1/070iirWP13_04.pdf
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Paper provided by Institute of Innovation Research, Hitotsubashi University in its series IIR Working Paper with number 13-04.

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Length: 53 p.
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:hit:iirwps:13-04
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  1. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  2. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
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  5. Wang, Pengfei & Wen, Yi, 2008. "Imperfect competition and indeterminacy of aggregate output," Journal of Economic Theory, Elsevier, vol. 143(1), pages 519-540, November.
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  8. Jovanovic, Boyan, 1987. "Micro Shocks and Aggregate Risk," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 395-409, May.
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  11. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
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  13. Nirei, Makoto, 2006. "Threshold behavior and aggregate fluctuation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 309-322, March.
  14. Topa, Giorgio, 2001. "Social Interactions, Local Spillovers and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 261-95, April.
  15. Daron Acemoglu & Vasco M. Carvalho & Asuman E. Ozdaglar & Alireza Tahbaz-Salehi, 2012. "The Network Origins of Aggregate Fluctuations," Levine's Working Paper Archive 786969000000000359, David K. Levine.
  16. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  17. Mark Doms & Timothy Dunne, 1994. "Capital Adjustment Patterns in Manufacturing Plants," Working Papers 94-11, Center for Economic Studies, U.S. Census Bureau.
  18. Canning, D. & Amaral, L. A. N. & Lee, Y. & Meyer, M. & Stanley, H. E., 1998. "Scaling the volatility of GDP growth rates," Economics Letters, Elsevier, vol. 60(3), pages 335-341, September.
  19. Blanchard, Olivier Jean & Summers, Lawrence H, 1988. "Beyond the Natural Rate Hypothesis," American Economic Review, American Economic Association, vol. 78(2), pages 182-87, May.
  20. Steven N. Durlauf, 1991. "Nonergodic Economic Growth," NBER Working Papers 3719, National Bureau of Economic Research, Inc.
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  22. Cooper, Russell, 1994. "Equilibrium Selection in Imperfectly Competitive Economies with Multiple Equilibria," Economic Journal, Royal Economic Society, vol. 104(426), pages 1106-22, September.
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