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Lumpy investment in sticky information general equilibrium

  • Fabio Verona

    ()

    (Universidade do Porto, Faculdade de Economia and CEF.UP)

This paper introduces lumpy micro-level investment into a sticky information general equilibrium model. Lumpy investment arises because of inattentiveness in capital investment decisions instead of the more popular assumption of non-convex adjustment costs. Sticky information is the only source of rigidity in the model and it is pervasive to all markets and decisions. The model yields aggregate dynamics that are substantially different from those of an otherwise identical model with frictionless investment, and much closer to the empirical evidence. These results therefore strengthen the case for the relevance of lumpy micro-level investment for the business cycle.

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File URL: http://www.fep.up.pt/investigacao/cef.up/WP/2011/2011_02_wp.pdf
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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 1102.

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Length: 42 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:por:cetedp:1102
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