Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics
By: Aubhik Khan and Julia K. Thomas.
Contributors: Thomas, Julia K.
Series: Working paper ;; no. 04-15; Working paper (Federal Reserve Bank of Philadelphia : Online) ;; no. 04-15.
Publisher: Federal Reserve Bank of Philadelphia
Published: 2004
Place of publication: Philadelphia, PA
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) decision rules with respect to capital;  as a result, their individual 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, greatly  increase the persistence of aggregate investment rates, yielding a better match  with the data.      In general equilibrium,  aggregate nonlinearities disappear, and investment rates are very persistent,  regardless of capital adjustment costs.  While the aggregate implications of  lumpy investment change substantially in equilibrium, the inclusion of fixed  costs or idiosyncratic shocks yields an average distribution of plant  investment rates that, in contrast, is largely unaffected by market-clearing  movements in real wages and interest rates.  Nonetheless, we find that to  understand the dynamics of plant-level investment requires general equilibrium  analysis"--Federal Reserve Bank of Philadelphia web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/26/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.