Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Jul, 1999, Volume 67, Issue 4

Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (, ) Approach

https://doi.org/10.1111/1468-0262.00053
p. 783-826

Ricardo J. Caballero, Eduardo M. R. A. Engel

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard sharp (S,s) bands, firms' adjustment policies take the form of a probability of adjustment () that responds smoothly to changes in firms' capacity gap. The model has appealing aggregation properties, and yields nonlinear aggregate time series processes. The passivity of normal times is, occasionally, more than offset by the brisk response to large accumulated shocks. Using within and out‐of‐sample criteria, we find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.


Log In To View Full Content