An Optimizing IS-LM Framework with Endogenous Investment / Miguel Casares, Bennett T. McCallum.

Format:

Book

Author/Creator:

Casares, Miguel.

Contributor:

National Bureau of Economic Research.

McCallum, Bennett T.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7908.

NBER working paper series no. w7908

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have been used for much recent monetary policy analysis, but usually with capital and investment treated as exogenous a significant restriction. This paper demonstrates that investment decisions can be endogenized without undue complexity in such models and that these can be calibrated to provide reasonably realistic dynamic behavior. It is necessary, however, to include capital adjustment costs; models with no adjustment costs match cyclical data very poorly. Indeed, their match is considerably poorer than models with constant capital. The paper also finds that the preferred adjustment-cost specification is not close to quadratic.

Notes:

Print version record

September 2000.