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What Explains the Lagged Investment Effect?

  • Janice C. Eberly
  • Sergio Rebelo
  • Nicolas Vincent

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16889.

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Date of creation: Mar 2011
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Publication status: published as Eberly, Janice & Rebelo, Sergio & Vincent, Nicolas, 2012. "What explains the lagged-investment effect?," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 370-380.
Handle: RePEc:nbr:nberwo:16889
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  2. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
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  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. Michael A. Salinger & Lawrence H. Summers, 1981. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study," NBER Working Papers 0757, National Bureau of Economic Research, Inc.
  19. Thomas Philippon, 2006. "The Bond Market's q," NBER Working Papers 12462, National Bureau of Economic Research, Inc.
  20. David O Lucca, 2007. "Resuscitating Time-to-Build," 2007 Meeting Papers 909, Society for Economic Dynamics.
  21. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April.
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