Time-To-Build and Convex Adjustment Costs

Petya Brooks

No 2001/009, IMF Working Papers from International Monetary Fund

Abstract: This paper incorporates time-to-build into the standard investment model with convex adjustment costs. The empirical Euler equation is estimated using a U.S. firm-level panel from Compustat. In spite of the introduction of time-to-build, the magnitude of the implied adjustment costs is unrealistically high. Exploiting another approach, I test directly the restrictions imposed by time-to-build on the investment equation. The results indicate that these restrictions cannot be rejected for five of the sixteen industries in the sample. Finally I show that time-to-build can explain approximately one-third of the variation in persistence of structure investment across four-digit industries.

Keywords: WP; capital stock; structural equation; Time-to-build; investment; investment equation; investment model; Compustat firm; optimization problem; investment process; investment rate; investment path; investment persistence; investment literature; Stocks; Estimation techniques; Manufacturing; Transportation; Bonds (search for similar items in EconPapers)
Pages: 23
Date: 2001-01-01
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Citations: View citations in EconPapers (7)

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