Working Paper

Adjustment costs of investment in general equilibrium: analytic results

Abstract: This paper formulates and compares various specifications of investment adjustment costs in a simple dynamic general-equilibrium model and studies their implications by showing some analytic results. One way to introduce costs is to incorporate them as a constant elasticity of substitution between investment and capital in the capital accumulation equation. Another way is as a nonlinear transformation between consumption and investment in the national income identity. We observe that there is a problem in identifying the two types of adjustment costs and show how to solve the problem. The properties of persistence and volatility are analyzed, with an emphasis on the size of adjustment costs.

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 1998

Number: 1998-39