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Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics

Aubhik Khan () and Julia Thomas

No 352, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We solve equilibrium models of lumpy investment wherein establishments face persistent shocks to common and plant-specific productivity. Nonconvex adjustment costs lead plants to pursue generalized (S, s) rules with respect to capital; thus, their investments are lumpy. In partial equilibrium, this yields substantial skewness and kurtosis in aggregate investment, though, with differences in plant-level productivity, these nonlinearities are far less pronounced. Moreover, nonconvex costs, like quadratic adjustment costs, increase the persistence of aggregate investment, yielding a better match with the data. In general equilibrium, aggregate nonlinearities disappear, and investment rates are very persistent, regardless of adjustment costs. While the aggregate implications of lumpy investment change substantially in equilibrium, the inclusion of fixed costs or idiosyncratic shocks makes the average distribution of plant investment rates largely invariant to market-clearing movements in real wages and interest rates. Nonetheless, we find that understanding the dynamics of plant-level investment requires general equilibrium analysis.

Keywords: Business enterprises; Investments; Capital investments (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics (2008) Downloads
Working Paper: Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics (2007) Downloads
Working Paper: Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics (2007) Downloads
Working Paper: Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics (2006) Downloads
Working Paper: Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics (2004) Downloads
Working Paper: Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics (2004)
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