Lumpy Investment in Dynamic General Equilibrium

Ruediger Bachmann (), Eduardo M.R.A. Engel () and Ricardo J Caballero ()
Additional contact information
Ruediger Bachmann: Department of Economics Yale University

No 775, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it is responsible for 92 percent of the smoothing in the investment response to aggregate shocks, and it introduces important nonlinearities and history dependance in business cycles and policy sensitivity. General equilibrium forces are responsible for the remaining 8 percent of smoothing and attenuate, but do not eliminate, aggregate nonlinearities. Not only is the lumpy model better micro-founded than the frictionless model, it also represents an improvement in terms of its ability to match conventional RBC moments, since it raises the volatility of consumption and employment to the levels observed in US data. The model also has distinct implications for the economy's response to large shocks and policy interventions. We illustrate these mechanisms by simulating the dynamics of an investment overhang episode. Our main methodological contribution is to develop a calibration procedure that combines data at different levels of aggregation (sectoral and aggregate)

Keywords: Lumpy investment; RBC model; $(S; s)$ model; idiosyncratic and aggregate shocks; sectoral shocks; adjustment costs; inertia; nonlinearities and history dependence; moments matching. (search for similar items in EconPapers)
JEL-codes: E10 E22 E30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2006-12-03
View citations in EconPapers

Downloads: (external link)
http://repec.org/sed2006/up.27191.1140043867.pdf (application/pdf)

Related works:
Working Paper: Lumpy Investment in Dynamic General Equilibrium (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:red:sed006:775

Access Statistics for this paper

More papers in 2006 Meeting Papers from Society for Economic Dynamics
Address: Society for Economic Dynamics Anne Stubing CV Starr Center for Applied Economics 269 Mercer Street, Room 303 New York University New York, NY 10003
Contact information at EDIRC.
Series data maintained by Christian Zimmermann ().