Lumpy Investment in Dynamic General Equilibrium

Ruediger Bachmann, Ricardo J Caballero () and Eduardo M.R.A. Engel ()
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Ruediger Bachmann: Yale University

No 1566, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment.

Keywords: Ss model; RBC model; Time-varying impulse response function; Aggregate shocks; Sectoral shocks; Idiosyncratic shocks; Adjustment costs; History dependence; Moment matching (search for similar items in EconPapers)
JEL-codes: E10 E22 E30 E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2006-06
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Working Paper: Lumpy Investment in Dynamic General Equilibrium (2006)
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