The Macroeconomics of Irreversibility

Isaac Baley and Andres Blanco

No 19815, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation.

Keywords: Investment frictions; Capital irreversibility; Tobin's q; Lumpiness; Capital adjustment costs; Capital misallocation; Transitional dynamics (search for similar items in EconPapers)
JEL-codes: D30 D80 E20 E30 (search for similar items in EconPapers)
Date: 2024-12
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