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Lumpy Investment in Dynamic General Equilibrium

Author Info

  • Ruediger Bachmann

    ()

    (Department of Economics Yale University)

  • Eduardo Engel
  • Ricardo Caballero

Abstract

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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File URL: http://repec.org/sed2006/up.27191.1140043867.pdf
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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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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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Keywords: Lumpy investment; RBC model; $(S; s)$ model; idiosyncratic and aggregate shocks; sectoral shocks; adjustment costs; inertia; nonlinearities and history dependence; moments matching.;

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Find related papers by 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)

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  11. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Marcelo Veracierto, 1998. "Plant level irreversible investment and equilibrium business cycles," Working Paper Series WP-98-1, Federal Reserve Bank of Chicago.
  13. Aubhik Khan & Julia Thomas, 2007. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," NBER Working Papers 12845, National Bureau of Economic Research, Inc.
  14. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
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  18. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
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Cited by:

  1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," Cowles Foundation Discussion Papers 1603, Cowles Foundation for Research in Economics, Yale University.
  2. Anil Kashyap & Francois Gourio, 2007. "Investment Spikes: New Facts and a General Equilibrium Exploration," 2007 Meeting Papers 148, Society for Economic Dynamics.
  3. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
  4. Aubhik Khan & Julia K. Thomas, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," Working Papers 04-15, Federal Reserve Bank of Philadelphia.
  5. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  6. Francois Gourio, 2007. "Disasters and Recoveries: A Note on the Barro-Rietz Explanation of the Equity Premium Puzzle," Boston University - Department of Economics - Working Papers Series WP2007-007, Boston University - Department of Economics.
  7. Shuyun Li, 2011. "Costly external finance, reallocation, and aggregate productivity," Journal of Productivity Analysis, Springer, vol. 35(3), pages 181-195, June.

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