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Lumpy Investment, Lumpy Inventories

  • Rüdiger Bachmann
  • Lin Ma

How do microeconomic frictions and microeconomic heterogeneity affect macroeconomic dynamics? We revisit the recent claim in the literature that nonconvex capital adjustment costs do not matter for aggregate dynamics. We argue that the neutrality of fixed adjustment frictions in general equilibrium hinges on the assumption of capital good homogeneity. With only one type of capital good to save and invest in, fixed capital investment dynamics are tightly linked to consumption dynamics, which are similar across lumpy and frictionless investment models. With capital goods heterogeneity, households optimally substitute between different ways of saving, which renders their consumption/saving decisions more sensitive to capital adjustment frictions. We quantify our arguments by introducing inventories into a two-sector lumpy investment model. We find that with inventories, frictionless fixed capital adjustment leads to an initial response of fixed capital investment to productivity shocks that is 50% higher than with capital adjustment frictions, calibrated to the fraction of plants undergoing lumpy investment episodes. We argue more generally that the details of how general equilibrium is introduced into the physical environment of a model matters for the aggregate relevance of microeconomic frictions and microeconomic heterogeneity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17924.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17924
Note: EFG ME
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  1. Aubhik Khan & Julia K. Thomas, 2000. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Working Papers 00-10, Federal Reserve Bank of Philadelphia.
  2. Anil Kashyap & Francois Gourio, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," 2007 Meeting Papers 148, Society for Economic Dynamics.
  3. Christopher House, 2008. "Fixed Costs and Long-Lived Investments," 2008 Meeting Papers 3, Society for Economic Dynamics.
  4. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
  5. Michael Reiter & Tommy Sveen & Lutz Weinke, 2009. "Lumpy investment and state-dependent pricing in general equilibrium," Working Paper 2009/05, Norges Bank.
  6. Ruediger Bachmann & Ricardo J. Caballero & Eduardo M.R.A. Engel, 2006. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," NBER Working Papers 12336, National Bureau of Economic Research, Inc.
  7. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  8. Michael K. Johnston, 2009. "Real and Nominal Frictions within the Firm: How Lumpy Investment Matters for Price Adjustment," Working Papers 09-36, Bank of Canada.
  9. Christopher L. House, 2008. "Fixed Costs and Long-Lived Investments," NBER Working Papers 14402, National Bureau of Economic Research, Inc.
  10. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity, Portfolio Choice, and Equilibrium Asset Returns," GSIA Working Papers 1997-45, Carnegie Mellon University, Tepper School of Business.
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