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Federal Reserve Bank of Chicago
Working Paper Series
Plant level irreversible investment and equilibrium business cycles
Marcelo Veracierto
Abstract

This paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a general equilibrium approach. To this end a real business cycle model of establishment level dynamics is formulated and analyzed. Investments decisions are subject to irreversibility constraints and consequently, are of the (S,s) variety. This complicates the analysis since the state of the economy is described by an endogenous distribution of agents. The paper develops a computational strategy that makes this class of (S,s) economies fully tractable. Contrary to what the previous literature has suggested, investment irreversibilities are found to have no effects on aggregate business cycle dynamics.


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Marcelo Veracierto, Plant level irreversible investment and equilibrium business cycles, Federal Reserve Bank of Chicago, Working Paper Series WP-98-1, 1998.
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Keywords: Business cycles ; Investments
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