Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach

Ricardo Caballero () and Eduardo M.R.A. Engel ()

No 12, Documentos de Trabajo from Centro de Economía Aplicada, Universidad de Chile

Abstract: In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard (S,s) bands, firms' adjustment policies are probabilistc, with a probability of adjusting specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very nonlinear (S,s) model to the linear partial adjustment model. Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly nonlinear. Using postwar sectoral U.S. manufacturing equipment and structures investment data, we estimate the aggregate model by maximum likelihood, and find clear evidence supporting the model. For a given sequence of aggregate shocks, the estimated nonlinear model generates briskier expansions and -to a lesser extent- sharper contractions than its linear counterparts. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.

Date: 1996
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Related works:
Journal Article: Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach (1999)
Working Paper: Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach (1994)
Working Paper: Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:edj:ceauch:12

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