Department of Economics and Business - Universitat Pompeu Fabra

Title:: The macroeconomics of irreversibility
Authors:: Isaac Baley and Andres Blanco
Date:: December 2024
Abstract:: We study aggregate capital dynamics in an investment model with idiosyncratic productivity shocks, fixed capital adjustment costs, and irreversibility driven by a wedge between capital purchase and resale prices. We derive sufficient statistics capturing the role of investment frictions on aggregate capital fluctuations, measure these statistics with investment microdata, and exploit them to discipline the capital price wedge. Irreversibility doubles the persistence of capital fluctuations and is crucial for reconciling micro-level investment behavior with macroeconomic propagation.
Keywords:: investment frictions, capital price wedge, irreversibility, lumpiness, fixed adjustment costs, capital misallocation, Tobin’s q, transitional dynamics, inaction, propagation.
JEL codes:: D30, D80, E20, E30
Area of Research:: Macroeconomics and International Economics

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