Working Paper: NBER ID: w7908
Authors: Miguel Casares; Bennett T. McCallum
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.
Keywords: No keywords provided
JEL Codes: E30; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| endogenization of investment decisions (G11) | realism of capital dynamics (P12) |
| endogenization of investment decisions (G11) | capital formation (E22) |
| endogenization of investment decisions (G11) | output dynamics (C67) |
| adjustment costs (J30) | realism of capital movement predictions (F21) |
| type of adjustment cost specification (C51) | model's ability to match empirical data (C52) |