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

@inproceedings{Caballero1999ExplainingID,
  title={Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach},
  author={Ricardo J. Caballero and Eduardo Engel},
  year={1999}
}
In this paper, the authors 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 (adjustment hazard) 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… CONTINUE READING

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