Macroeconomic Consequences of Lumpy Investment under Uncertainty

Yoshiyuki Arata, Yosuke Kimura and Hiroki Murakami ()

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: The stability of aggregate investment is central to our understanding of macroeconomic dynamics. It is also important to understand the impact of individual behaviors on aggregate patterns. Empirical studies have shown that individual investment behavior, at the plant level, is characterized by lumpiness and infrequency. The existing literature about the uncertainty-investment relationship has shown that uncertainty negatively affects investment decisions, i.e., when facing high uncertainty, firms prefer to "wait and see." The aim of this paper is to investigate how the lumpiness of investment activity under uncertainty affects the stability of the macroeconomy. We show that heterogeneity in capital adjustment processes of micro-agents contributes to the stability at the macroscopic level, and that this macro-stability is undermined in uncertain circumstances with interacting agents. In other words, while heterogeneous behaviors always enhance the stability of aggregate investment, coordination of interacting investors weakens this stabilizing force. As a result, a slight shock is sufficient to induce instability when investors are highly sensitive to uncertainty over economic environment. This is an explanation of simultaneous reduction of investment activities under high uncertainty, leading to a prolonged economic downturn.

Pages: 34 pages
Date: 2015-10
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.rieti.go.jp/jp/publications/dp/15e120.pdf (application/pdf)

Related works:
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: https://EconPapers.repec.org/RePEc:eti:dpaper:15120

Access Statistics for this paper

More papers in Discussion papers from Research Institute of Economy, Trade and Industry (RIETI) Contact information at EDIRC.
Bibliographic data for series maintained by TANIMOTO, Toko ().