Paper #1670

Title:

Aggregate dynamics in lumpy economies

Authors:

Isaac Baley and Andrés Blanco

Date:

May 2019

Abstract:

In economies with lumpy microeconomic adjustment, we establish structural relationships between the dynamics of the cross-sectional distribution of agents and its steady-state counterpart and discipline these relationships using micro data. Applying our methodology to firm lumpy investment, we discover that the dynamics of aggregate capital are structurally linked to two cross-sectional moments of the capital-to-productivity ratio: its dispersion and its covariance with the time elapsed since the last adjustment. We compute these sufficient statistics using plant�level data on the size and frequency of investments. We find that, in order to explain investment dynamics, the benchmark model with fixed adjustment costs must also feature a precise combination of irreversibility and random opportunities of free adjustment.

Keywords:

inaction, lumpiness, transitional dynamics, non convex adjustment costs, sufficient statistics, firm investment, adjustment hazard, Ss models.

JEL codes:

D30, D80, E20, E30

Area of Research:

Macroeconomics and International Economics

Published in:

Econometrica (Vol. 89, No. 3, May 2021)

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