An Optimizing Is-Lm Framework with Endogenous Investment

41 Pages Posted: 15 Sep 2000 Last revised: 19 Oct 2010

See all articles by Miguel Casares

Miguel Casares

Universidad Pública de Navarra

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Date Written: September 2000

Abstract

Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have been used for much recent monetary policy analysis, but usually with capital and investment treated as exogenous a significant restriction. This paper demonstrates that investment decisions can be endogenized without undue complexity in such models and that these can be calibrated to provide reasonably realistic dynamic behavior. It is necessary, however, to include capital adjustment costs; models with no adjustment costs match cyclical data very poorly. Indeed, their match is considerably poorer than models with constant capital. The paper also finds that the preferred adjustment-cost specification is not close to quadratic.

Suggested Citation

Casares, Miguel and McCallum, Bennett T., An Optimizing Is-Lm Framework with Endogenous Investment (September 2000). NBER Working Paper No. w7908. Available at SSRN: https://ssrn.com/abstract=242142

Miguel Casares

Universidad Pública de Navarra ( email )

Departamento de Economía
31006 Pamplona
Spain

Bennett T. McCallum (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2347 (Phone)
412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
45
Abstract Views
1,363
PlumX Metrics