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The Macroeconomics of Irreversibility

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  • Isaac Baley
  • Andres Blanco

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.

Suggested Citation

  • Isaac Baley & Andres Blanco, 2024. "The Macroeconomics of Irreversibility," FRB Atlanta Working Paper 2024-17, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:99326
    DOI: 10.29338/wp2024-17
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    More about this item

    Keywords

    investment frictions; capital price wedge; irreversibility; lumpiness; fixed adjustment costs; capital misallocation; Tobin's q; transitional dynamics; inaction; propagation;
    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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