Large Open Economies and Fixed Costs of Capital Adjustment

Christian Bayer and Volker Tjaden
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Volker Tjaden: Simon-Kucher & Partners

Review of Economic Dynamics, 2016, vol. 21, 125-146

Abstract: Capital reallocation creates excess volatility in investment in many two-country open economy models. Convex adjustment costs to capital have become a standard tool to deal with this. However, current microeconomic investment models feature non-convex adjustment costs as the dominant friction. This paper analyzes fixed costs to capital adjustment in a two-country business cycle model and finds that fixed costs - unlike in closed economies - dampen aggregate investment volatilities. Moreover, convex adjustment costs can serve as a stand-in for these fixed adjustment costs when one is interested in aggregate dynamics only. Yet, the mapping between fixed and quadratic adjustment costs co-depends on other model parameters. (Copyright: Elsevier)

Keywords: Aggregation; International business cycle models; Investment; Non-convex adjustment costs (search for similar items in EconPapers)
JEL-codes: C68 E22 E32 F41 F44 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1016/j.red.2015.05.001

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