NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

What Explains the Lagged Investment Effect?

Janice C. Eberly, Sergio Rebelo, Nicolas Vincent

NBER Working Paper No. 16889
Issued in March 2011
NBER Program(s):   EFG

The best predictor of current investment at the firm level is lagged investment. This lagged-investment effect is empirically more important than the cash-flow and Q effects combined. We show that the specification of investment adjustment costs proposed by Christiano, Eichenbaum and Evans (2005) predicts the presence of a lagged-investment effect and that a generalized version of their model is consistent with the behavior of firm-level data from Compustat.

Published: Eberly, Janice & Rebelo, Sergio & Vincent, Nicolas, 2012. "What explains the lagged-investment effect?," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 370-380.

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This paper was revised on February 7, 2012

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