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The Macroeconomics of Irreversibility

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  • Andrés Blanco
  • Isaac Baley

Abstract

We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation.

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  • Andrés Blanco & Isaac Baley, 2022. "The Macroeconomics of Irreversibility," Working Papers 1312, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1312
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    More about this item

    Keywords

    irreversibility; transitional dynamics; inaction; lumpiness; investment frictions; fixed adjustment costs; capital misallocation; Tobin's q; propagation; corporate taxes;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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