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Firm‐level Investment Spikes and Aggregate Investment over the Great Recession
Author(s) -
Disney Richard,
Miller Helen,
Pope Thomas
Publication year - 2020
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12301
Subject(s) - investment (military) , monetary economics , recession , economics , aggregate (composite) , great recession , business cycle , debt , variation (astronomy) , separately managed account , open ended investment company , labour economics , return on investment , macroeconomics , production (economics) , materials science , physics , politics , political science , astrophysics , law , composite material
It is widely accepted that firm‐level investment is characterized by periods of low investment punctuated by ‘spikes’, but widely debated whether such lumpiness matters for aggregate investment. We provide new empirical evidence that variation in UK aggregate investment is driven by variation in the number of firms undertaking investment spikes; this pattern holds for all sectors and across the business cycle. We set out and estimate a tractable firm‐level model of the timing of investment spikes that incorporates the effect of specific macroeconomic factors and aggregates to match observed variation in aggregate investment. Using simulations, we establish that low demand growth was the dominant factor inhibiting UK firms’ investment spikes immediately following the Great Recession, while heightened uncertainty prolonged low investment and prevented a ‘v‐shaped’ economic recovery. We use the Great Recession as a source of exogenous variation with which to study heterogeneity in response to aggregate shocks. We find that the minority of firms operating with persistently high‐debt levels—and therefore with balance sheets more exposed to the costs of financial distress—were significantly less likely to undertake an investment spike following the recession.