Interaction-based Foundation of Aggregate Investment Shocks

Makoto Nirei

No 128, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. I develop a method to derive the distribution of aggregate capital growth rate by embedding a fictitious tatonnement in a branching process. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. By incorporating this mechanism in a dynamic general equilibrium model with indivisible investment and sticky price, I provide the real business cycle theory with a driver of fluctuations: aggregate investment demand shocks that arise from idiosyncratic productivity shocks. Due to predetermined prices of goods, firms respond to investment shocks by adjusting labor and output, thereby causing the comovements of output and consumption with investment. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: Interaction-based Foundation of Aggregate Investment Shocks (2013)
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