Research Discussion Papers, Bank of Finland
No 16/2013:
Lumpy investment in sticky information general equilibrium
Fabio Verona ()
Abstract: In this paper, I introduce lumpy micro-level capital
adjustment into a sticky information general equilibrium model. Lumpy
adjustment arises because of inattentiveness in capital investment
decisions instead of the more common assumption of non-convex adjustment
costs. The model features inattentiveness as the only source of stickiness.
I find that the model with lumpy investment yields business cycle dynamics
which differ substantially from those of an otherwise identical model with
frictionless investment and are much more consistent with the empirical
evidence. These results therefore strengthen the case in favour of the
relevance of microeconomic investment lumpiness for the business cycle.
Keywords: sticky information; general equilibrium; lumpy investment; business cycle; (follow links to similar papers)
JEL-Codes: D83; E10; E22; E32; (follow links to similar papers)
37 pages, August 17, 2013
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