Lumpy Investment, Lumpy Inventories / Rüdiger Bachmann, Lin Ma.

Format:

Book

Author/Creator:

Bachmann, Rüdiger.

Contributor:

National Bureau of Economic Research.

Ma, Lin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17924.

NBER working paper series no. w17924

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

How do microeconomic frictions and microeconomic heterogeneity affect macroeconomic dynamics? We revisit the recent claim in the literature that nonconvex capital adjustment costs do not matter for aggregate dynamics. We argue that the neutrality of fixed adjustment frictions in general equilibrium hinges on the assumption of capital good homogeneity. With only one type of capital good to save and invest in, fixed capital investment dynamics are tightly linked to consumption dynamics, which are similar across lumpy and frictionless investment models. With capital goods heterogeneity, households optimally substitute between different ways of saving, which renders their consumption/saving decisions more sensitive to capital adjustment frictions. We quantify our arguments by introducing inventories into a two-sector lumpy investment model. We find that with inventories, frictionless fixed capital adjustment leads to an initial response of fixed capital investment to productivity shocks that is 50% higher than with capital adjustment frictions, calibrated to the fraction of plants undergoing lumpy investment episodes. We argue more generally that the details of how general equilibrium is introduced into the physical environment of a model matters for the aggregate relevance of microeconomic frictions and microeconomic heterogeneity.

Notes:

Print version record

March 2012.