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  3. American Economic Review
  4. January 2021
  5. Lumpy Investment, Business Cycles, and Stimulus Policy

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Lumpy Investment, Business Cycles, and Stimulus Policy

  • Thomas Winberry
American Economic Review
vol. 111, no. 1, January 2021
(pp. 364–96)
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Abstract

I study the aggregate implications of micro-level lumpy investment in a model consistent with the empirical dynamics of the real interest rate. The elasticity of aggregate investment with respect to shocks is procyclical because more firms are likely to make an extensive margin investment in expansions than in recessions. Matching the dynamics of the real interest rate is key to generating this result because it disciplines the interest-elasticity of investment and avoids counterfactual behavior of the model that would otherwise eliminate most of the procyclical responsiveness. Therefore, data on interest rates place important discipline in aggregating micro-level investment behavior.

Citation

Winberry, Thomas. 2021. "Lumpy Investment, Business Cycles, and Stimulus Policy." American Economic Review, 111 (1): 364–96. DOI: 10.1257/aer.20161723

Additional Materials

JEL Classification

  • D25 Intertemporal Firm Choice: Investment, Capacity, and Financing
  • E13 General Aggregative Models: Neoclassical
  • E22 Investment; Capital; Intangible Capital; Capacity
  • E23 Macroeconomics: Production
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)