Lumpy Investment, Lumpy Inventories

Ruediger Bachmann and Lin Ma

No 17924, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E20 E22 E3 E32 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG ME
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Published as RÜDIGER BACHMANN & LIN MA, 2016. "Lumpy Investment, Lumpy Inventories," Journal of Money, Credit and Banking, vol 48(5), pages 821-855.

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