TY  - JOUR
AU  - Caballero,Ricardo J.
AU  - Engel,Eduardo M.R.A.
TI  - Nonlinear Aggregate Investment Dynamics: Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6420
PY  - 1998
Y2  - February 1998
UR  - http://www.nber.org/papers/w6420
L1  - http://www.nber.org/papers/w6420.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 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, occasionally, more than offset by the brisk response to large accumulated shocks.  Using within and out-of-sample criteria, we find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.
ER  -