Open AccessAn interaction‐based foundation of aggregate investment fluctuations
Author(s) -
Nirei Makoto
Publication year - 2015
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te1611
Subject(s) - aggregate (composite) , economics , business cycle , investment (military) , capital (architecture) , general equilibrium theory , econometrics , productivity , distribution (mathematics) , microeconomics , monetary economics , macroeconomics , mathematics , materials science , politics , political science , law , composite material , history , mathematical analysis , archaeology
This study demonstrates that the interactions of firm‐level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. When investments are indivisible, aggregate capital is determined by the number of firms that invest. I develop a method to derive the closed‐form distribution of the number of investing firms when each firm's initial capital level varies stochastically. This method shows that idiosyncratic shocks may lead to nonvanishing aggregate fluctuations when the number of firms tends to infinity. I incorporate this mechanism in a dynamic general equilibrium model with indivisible investment and predetermined goods prices. The model features no aggregate exogenous shocks, and the fluctuation is driven by idiosyncratic productivity shocks. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.