Isaac Baley and Andrés Blanco
Working Paper 2024-17
December 2024
Full text
Abstract:
We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation.
JEL classification: D30, D80, E20, E30
Key words: investment frictions, capital price wedge, irreversibility, lumpiness, fixed adjustment costs, capital misallocation, Tobin's q, transitional dynamics, inaction, propagation
https://doi.org/10.29338/wp2024-17
The authors benefited from conversations with Fernando Alvarez, Andrea Lanteri, Francesco Lippi, Juan Carlos Suá,Árez-Serrato, and their discussant Thomas Winberry. They also thank the editor, anonymous referees, as well as Andrew Abel, Andrey Alexandrov, Jan Eeckhout, Eduardo Engel, Jordi Galí, John Leahy, Pablo Ottonello, Edouard Schaal, Jaume Ventura, and seminar participants at Boston University, Carnegie Mellon, CREI, ECB, EUI, Goethe University, IIES, ITAM, Kansas Fed, Richmond Fed, Universidad Católica de Chile, UPF, Universidad Carlos III, University of Michigan, Essex, NBER Summer Institute 2021, IMSI, SED Meetings 2022, 8th Conference on New Developments in Business Cycle Analysis, Transpyrenean Macro Workshop 2022, and Science Po 12th Macro Workshop for helpful comments. Jafet Baca, Lauri Esala, Madalena Gaspar, Erin Markiewitz, and Nicolá,Ás Oviedo provided outstanding research assistance. Baley acknowledges financial support from the Spanish Ministry of Economy and Competitiveness through the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019- 000915-S), EIBURS grant (ECON-PSR-INDF-2023-05), and ERC Grant (101041334 MacroTaxReforms). This research was partly funded by the Michigan Institute for Teaching and Research in Economics. The views here are those of the authors and not the Atlanta Fed or the Federal Reserve System. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Andrés Blanco, Federal Reserve Bank of Atlanta, julioablanco84@gmail.com; or Isaac Baley, Universitat Pompeu Fabra, Centre de Recerca en Economia International, Barcelona School of Economics, and Centre for Economic Policy Research.
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