Preliminary and Incomplete Comments Solicited Investment Planning Costs and the Effects of Fiscal and Monetary Policy

@inproceedings{Basu2003PreliminaryAI,
  title={Preliminary and Incomplete Comments Solicited Investment Planning Costs and the Effects of Fiscal and Monetary Policy},
  author={Susanto Basu and Miles S. Kimball},
  year={2003}
}
We show that simple “New Keynesian” models with capital but without investment frictions have counterfactual predictions regarding the short-run effects of fiscal policy shocks: fiscal expansions lower output, employment, and the real interest rate in these models. We modify the model by assuming that investment projects are costly to start or stop, which is consistent with micro evidence. Adding investment planning costs restores the aggregate expenditure logic of the Keynesian Cross, and… CONTINUE READING

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