Keywords: Investment, adjustment costs, identified VAR
Abstract: This paper uses the response of investment to identified structural shocks to investigate some key issues, including
the nature of adjustment costs and investment's responsiveness to user cost. In the estimation, the model parameters
are chosen to match as closely as possible the impulse responses from an identified VAR. In the preferred results,
both investment- and capital-stock adjustment costs are important; the size of the capital-stock adjustment costs is
in line with estimates from firm-level studies; the investment-adjustment costs suggest rapid adjustment of investment
to its desired level; and the estimated elasticity of substitution between capital and other inputs is considerably
smaller than one. There is, however, an important sensitivity: The VAR's identified aggregate demand shock leads to
a large crowding out effect--when output expands, investment falls. When this shock is included among those matched,
the elasticity of substitution is near one and only investment adjustment costs are important.
Full paper (366 KB PDF)
Home | FEDS | List of 2005 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: December 23, 2005