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Hayashi Meets Kiyotaki and Moore: A Theory of Capital Adjustment

Pengfei Wang () and Yi Wen ()

Review of Economic Dynamics, 2012, vol. 15, issue 2, 207-225

Abstract: Firm-level investment is lumpy and volatile but aggregate investment is much smoother and highly serially correlated. These different patterns of investment behavior have been viewed as indicating convex adjustment costs at the aggregate level but non-convex adjustment costs at the firm level. This paper shows that financial frictions in the form of collateralized borrowing at the firm level (Kiyotaki and Moore, 1997) can give rise to convex adjustment costs at the aggregate level yet at the same time generate lumpiness in plant-level investment. In particular, our model can (i) derive aggregate capital adjustment cost functions identical to those assumed by Hayashi (1982) and (ii) explain the weak empirical relationship between Tobin's Q and plant-level investment. (Copyright: Elsevier)

Keywords: Adjustment costs; Collateral; Borrowing constraints; Tobin's Q; Lumpy investment (search for similar items in EconPapers)
JEL-codes: E22 E62 G31 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1016/j.red.2011.09.004

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