Lumpy Investment in Dynamic General Equilibrium

53 Pages Posted: 20 Jun 2006

See all articles by Ruediger Bachmann

Ruediger Bachmann

Yale University

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 15, 2006

Abstract

Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment.

Keywords: (S, s) model, RBC model, time-varying impulse response function, aggregate shocks, sectoral shocks, idiosyncratic shocks, adjustment costs, history dependence, moment matching

JEL Classification: E10, E22, E30, E32, E62

Suggested Citation

Bachmann, Ruediger and Engel, Eduardo M. and Caballero, Ricardo J., Lumpy Investment in Dynamic General Equilibrium (June 15, 2006). MIT Department of Economics Working Paper No. 06-20, Cowles Foundation Discussion Paper No. 1566, Available at SSRN: https://ssrn.com/abstract=910564 or http://dx.doi.org/10.2139/ssrn.910564

Ruediger Bachmann

Yale University ( email )

New Haven, CT 06520
United States

Eduardo M. Engel

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-5595 (Phone)
203-432-5779 (Fax)

National Bureau of Economic Research (NBER)

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Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Building E52-528
Cambridge, MA 02142
United States
617-253-0489 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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