Title: An interaction-based foundation of aggregate investment fluctuations
Abstract: Theoretical EconomicsVolume 10, Issue 3 p. 953-985 Original ArticlesOpen Access An interaction-based foundation of aggregate investment fluctuations Makoto Nirei, Makoto Nirei [email protected] Institute of Innovation Research, Hitotsubashi University I am grateful to the co-editor Gadi Barlevy and three anonymous referees for their very helpful suggestions. I would like to thank Lars Hansen, José Scheinkman, Fernando Alvarez, and Katsuhito Iwai for their advice. I benefited greatly from conversations with Vasco Carvalho, Xavier Gabaix, Erzo Luttmer, and colleagues at Santa Fe Institute, Utah State, Carleton, and Hitotsubashi University. This work was supported by JSPS KAKENHI Grant 21730154. Search for more papers by this author Makoto Nirei, Makoto Nirei [email protected] Institute of Innovation Research, Hitotsubashi University I am grateful to the co-editor Gadi Barlevy and three anonymous referees for their very helpful suggestions. I would like to thank Lars Hansen, José Scheinkman, Fernando Alvarez, and Katsuhito Iwai for their advice. I benefited greatly from conversations with Vasco Carvalho, Xavier Gabaix, Erzo Luttmer, and colleagues at Santa Fe Institute, Utah State, Carleton, and Hitotsubashi University. This work was supported by JSPS KAKENHI Grant 21730154. Search for more papers by this author First published: 09 October 2015 https://doi.org/10.3982/TE1611Citations: 9 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Abstract This study demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. When investments are indivisible, aggregate capital is determined by the number of firms that invest. I develop a method to derive the closed-form distribution of the number of investing firms when each firm's initial capital level varies stochastically. This method shows that idiosyncratic shocks may lead to nonvanishing aggregate fluctuations when the number of firms tends to infinity. I incorporate this mechanism in a dynamic general equilibrium model with indivisible investment and predetermined goods prices. The model features no aggregate exogenous shocks, and the fluctuation is driven by idiosyncratic productivity shocks. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration. 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