Modeling aggregate investment: a fundamentalist approach
No 2003-48, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
This paper applies some lessons from recent estimation of investment models with firm-level data to the aggregate data with an eye to rehabilitating convex costs of adjusting the capital stock. In recent firm-level work, the response of investment to output and other \"fundamental\" variables is interpreted in terms of the traditional convex-adjustment-cost model, implying annual capital-stock adjustment speeds on the order of 15 to 35 percent. In aggregate data, I find that this \"fundamentalist\" model can account for the reduced-form effect of output on investment and the estimated capital-stock adjustment speed is similar to those from firm-level studies B--around 25 percent per year. To account for the slower adjustment to changes in the cost of capital, I consider a model in which the capital-intensity of production is also costly to adjust. I find that this model can account for the reduced-form effects of both output and the cost of capital on investment.
Keywords: Capital; Investments (search for similar items in EconPapers)
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