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Lumpy investment in sticky information general equilibrium

Author

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  • Fabio Verona

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

Abstract

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.

Suggested Citation

  • Fabio Verona, 2011. "Lumpy investment in sticky information general equilibrium," CEF.UP Working Papers 1102, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:cetedp:1102
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    Cited by:

    1. Verona, Fabio, 2014. "Pervasive inattentiveness," Economics Letters, Elsevier, vol. 125(2), pages 287-290.
    2. Burgert, Matthias & Schmidt, Sebastian, 2014. "Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 282-299.
    3. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
    4. Cogan, John F. & Taylor, John B. & Wieland, Volker & Wolters, Maik Hendrik, 2013. "Fiscal consolidation strategy: An update for the budget reform proposal of march 2013," IMFS Working Paper Series 68, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    5. Fabio Verona & Maik Wolters, 2014. "Sticky Information Models in Dynare," Computational Economics, Springer;Society for Computational Economics, vol. 43(3), pages 357-370, March.
    6. Fabio Verona, 2011. "Lumpy investment in sticky information general equilibrium," CEF.UP Working Papers 1102, Universidade do Porto, Faculdade de Economia do Porto.
    7. Wieland, Volker & Wolters, Maik, 2014. "Is there a threat of self-reinforcing deflation in the euro area? A view through the lens of the Phillips curve," Kiel Policy Brief 79, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Sticky information; lumpy investment; general equilibrium; business cycles;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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