Lumpy Investment, Sectoral Propagation, and Business Cycles

Makoto Nirei

No 330, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: This paper proposes a model of endogenous fluctuations in investment. A monopolistic producer has an incentive to invest when the aggregate demand is high. This causes a propagation of investment across sectors. When the investment follows an (S,s) policy, the propagation size can exhibit a significant fluctuation. We characterize the probability distribution of the propagation size, and show that its variance can be large enough to match the observed investment fluctuations. We then implement this mechanism in a dynamic general equilibrium model to explore an investment-driven business cycle. By calibrating the model with the SIC 4-digit level industry data, we numerically show that the model replicates the basic structure of the business cycles

Keywords: (S; s) policy; aggregation; propagation; heavy-tailed distribution (search for similar items in EconPapers)
JEL-codes: E1 E22 E32 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cmp and nep-mac
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Working Paper: Lumpy Investment, Sectoral Propagation, and Business Cycles (2004)
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