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Lumpy Investment in Dynamic General Equilibrium

  • Ruediger Bachmann

    ()

    (Department of Economics Yale University)

  • Eduardo Engel
  • Ricardo Caballero

Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it is responsible for 92 percent of the smoothing in the investment response to aggregate shocks, and it introduces important nonlinearities and history dependance in business cycles and policy sensitivity. General equilibrium forces are responsible for the remaining 8 percent of smoothing and attenuate, but do not eliminate, aggregate nonlinearities. Not only is the lumpy model better micro-founded than the frictionless model, it also represents an improvement in terms of its ability to match conventional RBC moments, since it raises the volatility of consumption and employment to the levels observed in US data. The model also has distinct implications for the economy's response to large shocks and policy interventions. We illustrate these mechanisms by simulating the dynamics of an investment overhang episode. Our main methodological contribution is to develop a calibration procedure that combines data at different levels of aggregation (sectoral and aggregate)

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 775.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:775
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