Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics
By: Aubhik Khan and Julia Thomas.
Contributors: Thomas, Julia.
Series: Federal Reserve Bank of Minneapolis, Research Department staff report ;; 352; Staff report (Federal Reserve Bank of Minneapolis. Research Dept. : Online) ;; 352.
Publisher: Federal Reserve Bank of Minneapolis
Published: 2004
Place of publication: [Minneapolis, Minn.]
Language: eng
Format: Electronic resource
Subjects: Capital investments -- Econometric models.
Description: "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"--Federal Reserve Bank of Minneapolis web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 12/2/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.