Creator: Khan, Aubhik and Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 352 Abstract:
We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S, s) rules with respect to capital; thus, their investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though, with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, increase the persistence of aggregate investment, yielding a better match with the data. In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks makes the average distribution of plant investment rates largely invariant to market-clearing movements in real wages and interest rates. Nonetheless, we find that understanding the dynamics of plant-level investment requires general equilibrium analysis.
Keyword: Establishment investment, (S,s), Lumpy investment, Nonlinearities, and Policies Subject (JEL): E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity
Creator: Khan, Aubhik and Thomas, Julia Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 306 Abstract:
Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.
Keyword: Adjustment costs, Lumpy investment, Nonlinearities, and Business cycles Subject (JEL): E32 - Business Fluctuations; Cycles and E22 - Investment; Capital; Intangible Capital; Capacity