Nonlinear Aggregate Investment Dynamics: Theory and Evidence / Ricardo J. Caballero, Eduardo M.R.A. Engel.

Format:

Book

Author/Creator:

Caballero, Ricardo J.

Contributor:

National Bureau of Economic Research.

Engel, Eduardo M.R.A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6420.

NBER working paper series no. w6420

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Nonlinear Aggregate Investment Dynamics

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1998.

Summary:

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard sharp (S,s) bands, firms' adjustment policies take the form of a probability of adjustment (adjustment hazard) that responds smoothly to changes in firms' capacity gap. The model has appealing aggregation properties, and yields nonlinear aggregate time series processes. The passivity of normal times is, occasionally, more than offset by the brisk response to large accumulated shocks. Using within and out-of-sample criteria, we find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.

Notes:

Print version record

February 1998.