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Lumpy Investment in Sticky Information General Equilibrium

41 Pages Posted: 25 Sep 2013  

Fabio Verona

Bank of Finland - Research

Date Written: June 4, 2013

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 favor of the relevance of microeconomic investment lumpiness for the business cycle.

Keywords: sticky information, general equilibrium, lumpy investment, business cycle

JEL Classification: D83, E10, E22, E32

Suggested Citation

Verona, Fabio, Lumpy Investment in Sticky Information General Equilibrium (June 4, 2013). Bank of Finland Research Discussion Paper No. 16/2013. Available at SSRN: https://ssrn.com/abstract=2330811 or http://dx.doi.org/10.2139/ssrn.2330811

Fabio Verona (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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