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Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment

Author

Listed:
  • Pengfei Wang

    (Hong Kong University of Science and Technology)

  • Yi Wen

    (Federal Reserve Bank of St. Louis)

Abstract

Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin's Q and plant-level investment. (Copyright: Elsevier)

Suggested Citation

  • Pengfei Wang & Yi Wen, 2012. "Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 207-225, April.
    • Handle: RePEc:red:issued:10-200
    DOI: 10.1016/j.red.2011.09.004
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    3. Zouhair Ait Benhamou, 2017. "Microfoundations of the New Keynesian Phillips Curve in an Open Emerging Economy," Post-Print hal-02977727, HAL.
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    6. Liu, Xuewen & Wang, Pengfei & Yang, Zhongchao, 2024. "Delayed crises and slow recoveries," Journal of Financial Economics, Elsevier, vol. 152(C).
    7. Matteo F. Ghilardi & Roy Zilberman, 2024. "Macroeconomic Effects of Dividend Taxation with Investment Credit Limits," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 2(3), pages 409-448.
    8. Christoph Görtz & Afrasiab Mirza, 2014. "On the Applicability of Global Approximation Methods for Models with Jump Discontinuities in Policy Functions," CESifo Working Paper Series 4837, CESifo.
    9. Pengfei Wang & Yi Wen & Zhiwei Xu, 2018. "Financial Development and Long-Run Volatility Trends," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 221-251, April.
    10. Dong, Feng & Xu, Zhiwei, 2022. "Bubbly bailout," Journal of Economic Theory, Elsevier, vol. 202(C).
    11. Jianjun Miao & Pengfei Wang, 2014. "A Q-theory model with lumpy investment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 133-159, September.
    12. Hirokazu Mizobata, 2014. "What determines the Japanese firm investments: real or financial?," Applied Economics, Taylor & Francis Journals, vol. 46(3), pages 303-311, January.
    13. Feng Dong & Yi Wen, 2017. "Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis," Working Papers 2017-25, Federal Reserve Bank of St. Louis.
    14. Schulte, Reinhard, 2018. "New venture investing trajectories: A large scale longitudinal study," Lüneburger Beiträge zur Gründungsforschung 13, Leuphana University of Lüneburg, Department of Entrepreneurship & Start-up Management.
    15. Andreas Tryphonides, 2017. "Set Identified Dynamic Economies and Robustness to Misspecification," Papers 1712.03675, arXiv.org, revised Jan 2018.
    16. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    17. Paul Gretton, 2022. "National and Sectoral Effects of a Decline in the Desirability of Investing in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 55(1), pages 91-121, March.
    18. Liu, Chia-Ying & Wang, Wei-Neng, 2020. "On the optimality of social status seeking," Economic Modelling, Elsevier, vol. 93(C), pages 520-525.
    19. Pengfei Wang & Yi Wen & Zhiwei Xu, 2012. "Two-way capital flows and global imbalances: a neoclassical approach," Working Papers 2012-016, Federal Reserve Bank of St. Louis.
    20. Andreas Tryphonides, 2020. "Heterogeneity and the Dynamic Effects of Aggregate Shocks," Papers 2007.14022, arXiv.org.
    21. Zouhair Aït Benhamou, 2017. "Microfoundations of the New Keynesian Phillips Curve in an Open Emerging Economy," Working Papers hal-04141622, HAL.
    22. Sharma, Saurabh & Behera, Harendra, 2022. "A dissection of Indian growth using a DSGE filter," Journal of Asian Economics, Elsevier, vol. 80(C).
    23. Mizobata, Hirokazu, 2016. "Differing factor adjustment costs across industries: Evidence from Japan," Economic Modelling, Elsevier, vol. 54(C), pages 382-391.
    24. Jiao, Yang, 2024. "Financial crises, bailouts and monetary policy in open economies," Journal of International Economics, Elsevier, vol. 151(C).
    25. Zhiwei Xu & Pengfei Wang & Jianjun Miao, 2013. "A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles," 2013 Meeting Papers 167, Society for Economic Dynamics.

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    More about this item

    Keywords

    Adjustment costs; Collateral; Borrowing constraints; Tobin's Q; Lumpy investment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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