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Explaining Investment Dynamics in U.S. Manufacturing: A Generalized ( S , s ) Approach
Author(s) -
Caballero Ricardo J.,
Engel Eduardo M. R. A.
Publication year - 1999
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/1468-0262.00053
Subject(s) - economics , investment (military) , aggregate (composite) , econometrics , offset (computer science) , hazard , aggregate data , hazard model , sample (material) , mathematics , computer science , statistics , politics , political science , law , chemistry , materials science , organic chemistry , chromatography , composite material , programming language
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.