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Modeling aggregate investment: a fundamentalist approach

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  • John M. Roberts

Abstract

This paper applies some lessons from recent estimation of investment models with firm-level data to the aggregate data with an eye to rehabilitating convex costs of adjusting the capital stock. In recent firm-level work, the response of investment to output and other \"fundamental\" variables is interpreted in terms of the traditional convex-adjustment-cost model, implying annual capital-stock adjustment speeds on the order of 15 to 35 percent. In aggregate data, I find that this \"fundamentalist\" model can account for the reduced-form effect of output on investment and the estimated capital-stock adjustment speed is similar to those from firm-level studies B--around 25 percent per year. To account for the slower adjustment to changes in the cost of capital, I consider a model in which the capital-intensity of production is also costly to adjust. I find that this model can account for the reduced-form effects of both output and the cost of capital on investment.

Suggested Citation

  • John M. Roberts, 2003. "Modeling aggregate investment: a fundamentalist approach," Finance and Economics Discussion Series 2003-48, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2003-48
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    References listed on IDEAS

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    Cited by:

    1. John M. Roberts, 2005. "Using structural shocks to identify models of investment," Finance and Economics Discussion Series 2005-69, Board of Governors of the Federal Reserve System (U.S.).
    2. Chris Murphy, 2016. "The effects on consumer welfare of a corporate tax cut," Departmental Working Papers 2016-10, The Australian National University, Arndt-Corden Department of Economics.
    3. Fazzari, Steven M. & Ferri, Piero & Greenberg, Edward, 2010. "Investment and the Taylor rule in a dynamic Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2010-2022, October.
    4. Arthur Grimes, 2009. "Capital intensity and welfare: traded and non-trade sector determinants," New Zealand Economic Papers, Taylor & Francis Journals, vol. 43(1), pages 21-39.

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    Capital; Investments;

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