Aggregate dynamics in lumpy Economies

Baley, Isaac; Blanco, Andrés

doi:http://dx.doi.org/10.3982/ECTA17344

Aggregate dynamics in lumpy Economies

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Baley I, Blanco A. Aggregate dynamics in lumpy Economies. Econometrica. 2021 May;89(3):1235-64. DOI: 10.3982/ECTA17344

Abstract

How does an economy’s capital respond to aggregate productivity shocks when firms make lumpy investments? We show that capital’s transitional dynamics are structurally linked to two steady-state moments: the dispersion of capital to productivity ratios—an indicator of capital misallocation—and the covariance of capital to productivity ratios with the time elapsed since their last adjustment—an indicator of asymmetric costs of upsizing and downsizing the capital stock. We compute these two sufficient statistics using data on the size and frequency of investment of Chilean plants. The empirical values indicate significant effects of aggregate productivity shocks and favor investment models with a strong downsizing rigidity and random opportunities for free adjustments.