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Lumpy Investment in Dynamic General Equilibrium

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Author Info
Ruediger Bachmann () (Department of Economics Yale University)
Eduardo Engel
Ricardo Caballero

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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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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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Related research
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 - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
  3. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 359-83, May. [Downloadable!] (restricted)
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  4. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June. [Downloadable!] (restricted)
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  5. Caballero, Ricardo J & Engel, Eduardo M R A, 1991. "Dynamic (S, s) Economies," Econometrica, Econometric Society, vol. 59(6), pages 1659-86, November. [Downloadable!] (restricted)
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  6. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181. [Downloadable!] (restricted)
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  9. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
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  10. 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. [Downloadable!] (restricted)
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  11. Caballero, Ricardo J. & Engel, Eduardo M. R. A., 1993. "Microeconomic rigidities and aggregate price dynamics," European Economic Review, Elsevier, vol. 37(4), pages 697-711, May. [Downloadable!] (restricted)
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  12. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October. [Downloadable!] (restricted)
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  13. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
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  17. 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. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," Working Papers 952, Economic Growth Center, Yale University. [Downloadable!]
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  2. 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. [Downloadable!]
    Other versions:
  3. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
    Other versions:
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