TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Engel,Eduardo M.R.A.
TI  - Explaining Investment Dynamics in U.S. Manufacturing: A Generalized     (S,s) Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4887
PY  - 1994
Y2  - October 1994
UR  - http://www.nber.org/papers/w4887
L1  - http://www.nber.org/papers/w4887.pdf
N1  - Author contact info:
Ricardo J. Caballero
MIT
Department of Economics
Room E52-373a
Cambridge, MA 02142-1347
Tel: 617/253-0489
Fax: 617/253-6915
E-Mail: caball@mit.edu

Eduardo Engel
Yale University
Department of Economics
P.O. Box 208268
New Haven, CT  06520-8268
Tel: 203/432-5595
Fax: 203/432-5779
E-Mail: eduardo.engel@yale.edu
AB  - 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 (S,s) bands, firms' optimal adjustment policies are probabilistic, with a probability of adjusting (adjustment hazard) that grows smoothly with firms' disequilibria.  Depending upon the specification of the distribution of fixed adjustment costs, the adjustment hazards approach encompasses models ranging from the very non-linear (S,s) model to the linear partial adjustment model.  Except for the latter extreme, the processes for aggregate investment obtained from adding up the actions of firms subject to aggregate and idiosyncratic shocks, is highly non-linear.  Estimating the aggregate model by maximum likelihood, we find clear evidence supporting non-linear models over linear ones for postwar sectoral U.S. manufacturing equipment and structures investment.  For a given sequence of aggregate shocks, the nonlinear model estimated generates brisker expansions and - to a lesser extent - sharper contractions than its linear counterpart. These features fit well the observed positive skewness and large kurtosis of U.S. manufacturing sectoral investment/capital ratios.
ER  -