TY  - JOUR
AU  - Casares,Miguel
AU  - McCallum,Bennett T.
TI  - An Optimizing IS-LM Framework with Endogenous Investment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7908
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w7908
L1  - http://www.nber.org/papers/w7908.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu
AB  - Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have been used for much recent monetary policy analysis, but usually with capital and investment treated as exogenous a significant restriction.  This paper demonstrates that investment decisions can be endogenized without undue complexity in such models and that these can be calibrated to provide reasonably realistic dynamic behavior.  It is necessary, however, to include capital adjustment costs; models with no adjustment costs match cyclical data very poorly.  Indeed, their match is considerably poorer than models with constant capital. The paper also finds that the preferred adjustment-cost specification is not close to quadratic.
ER  -