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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
Note: EFG
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