NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Laura Power

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September 1995Machine Replacement and the Business Cycle: Lumps and Bumps
with Russell Cooper, John Haltiwanger: w5260
This paper explores cyclical fluctuations in investment due to discrete changes in the plant's stock of capital. To do so, we focus on a machine replacement problem in which a producer decides whether to replace its entire existing stock of capital with new machinery and equipment. This decision is undertaken in a stochastic, dynamic environment which allows us to characterize the relationship between lumpy investment and the state of the aggregate economy. Our theoretical results are supplemented by numerical and empirical analyses of the dynamics of lumpy investment at the plant level and the associated aggregate implications. The dynamics are surprisingly rich since they represent the interaction between a replacement cycle, the cross sectional distribution of the age of the capital...

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