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Lumpy Investment, Sectoral Propagation, and Business Cycles

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  • Makoto Nirei

Abstract

This paper proposes a model of endogenous fluctuations in investment. A monopolistic producer has an incentive to invest when the aggregate demand is high. This causes a propagation of investment across sectors. When the investment follows an (S,s) policy, the propagation size can exhibit a significant fluctuation. We characterize the probability distribution of the propagation size, and show that its variance can be large enough to match the observed investment fluctuations. We then implement this mechanism in a dynamic general equilibrium model to explore an investment-driven business cycle. By calibrating the model with the SIC 4-digit level industry data, we numerically show that the model replicates the basic structure of the business cycles

Suggested Citation

  • Makoto Nirei, 2004. "Lumpy Investment, Sectoral Propagation, and Business Cycles," Computing in Economics and Finance 2004 330, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:330
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    References listed on IDEAS

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    More about this item

    Keywords

    (S; s) policy; aggregation; propagation; heavy-tailed distribution;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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