Abstract: This paper formulates and compares various specifications of investment adjustment costs in a simple dynamic general-equilibrium model and studies their implications by showing some analytic results. One way to introduce adjustment costs is to incorporate them as a constant elasticity of substitution between investment and capital in the capital accumulation equation. Another way is as a nonlinear transformation between consumption and investment in the national income identity. We observe that there is a problem in identifying the two types of adjustment costs and show how to solve the problem. The properties of persistence and volatility are analytically discussed with an emphasis on the size of adjustment costs.

Full paper (185 KB PDF) | Full paper (169 KB Postscript)