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Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach

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Author Info
Ricardo J. Caballero
Eduardo M.R.A. Engel ()

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Abstract

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard (S,s) bands, firms' adjustment policies are probabilistc, with a probability of adjusting specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very nonlinear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly nonlinear. Using postwar sectoral U.S. manufacturing equipment and structures investment data, we estimate the aggregate model by maximum likelihood, and find clear evidence supporting the model. For a given sequence of aggregate shocks, the estimated nonlinear model generates briskier expansions and -to a lesser extent- sharper contractions than its linear counterparts. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

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Publisher Info
Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 12.

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Date of creation: 1996
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Handle: RePEc:edj:ceauch:12

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References listed on IDEAS
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  1. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 223-46, April. [Downloadable!] (restricted)
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  2. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May. [Downloadable!] (restricted)
  3. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-2), pages 443-520. [Downloadable!]
  4. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-84, April. [Downloadable!] (restricted)
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  5. repec:fth:coluec:465 is not listed on IDEAS
  6. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers 1990_20, Columbia University, Department of Economics.
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