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Nonconvex Factor Adjustments in Equilibrium Business Cycle Models: Do Nonlinearities Matter?

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  • Aubhik Khan
  • Julia K. Thomas

Abstract

Using an equilibrium business cycle model, we search for agregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such adjustment costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model where aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.

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  • Aubhik Khan & Julia K. Thomas, "undated". "Nonconvex Factor Adjustments in Equilibrium Business Cycle Models: Do Nonlinearities Matter?," GSIA Working Papers 2000-E33, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:401
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