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Macroeconomic Consequences of Lumpy Investment under Uncertainty

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  • ARATA Yoshiyuki
  • KIMURA Yosuke
  • MURAKAMI Hiroki

Abstract

The stability of aggregate investment is central to our understanding of macroeconomic dynamics. It is also important to understand the impact of individual behaviors on aggregate patterns. Empirical studies have shown that individual investment behavior, at the plant level, is characterized by lumpiness and infrequency. The existing literature about the uncertainty-investment relationship has shown that uncertainty negatively affects investment decisions, i.e., when facing high uncertainty, firms prefer to "wait and see." The aim of this paper is to investigate how the lumpiness of investment activity under uncertainty affects the stability of the macroeconomy. We show that heterogeneity in capital adjustment processes of micro-agents contributes to the stability at the macroscopic level, and that this macro-stability is undermined in uncertain circumstances with interacting agents. In other words, while heterogeneous behaviors always enhance the stability of aggregate investment, coordination of interacting investors weakens this stabilizing force. As a result, a slight shock is sufficient to induce instability when investors are highly sensitive to uncertainty over economic environment. This is an explanation of simultaneous reduction of investment activities under high uncertainty, leading to a prolonged economic downturn.

Suggested Citation

  • ARATA Yoshiyuki & KIMURA Yosuke & MURAKAMI Hiroki, 2015. "Macroeconomic Consequences of Lumpy Investment under Uncertainty," Discussion papers 15120, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:15120
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    References listed on IDEAS

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