Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach / 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. w4887.

NBER working paper series no. w4887

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Explaining Investment Dynamics in U.S. Manufacturing A Generalized

Explaining Investment Dynamics in U.S. Manufacturing

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

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 (S,s) bands, firms' optimal adjustment policies are probabilistic, with a probability of adjusting (adjustment hazard) that grows smoothly with firms' disequilibria. Depending upon the specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very non-linear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly non-linear. Estimating the aggregate model by maximum likelihood, we find clear evidence supporting non-linear models over linear ones for postwar sectoral U.S. manufacturing equipment and structures investment. For a given sequence of aggregate shocks, the nonlinear model estimated generates brisker expansions and - to a lesser extent - sharper contractions than its linear counterpart. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

Notes:

Print version record

October 1994.