Paper #869

Title:

Is lumpy investment really irrelevant for the business cycle?

Authors:

Tommy Sveen and Lutz Weinke

Date:

June 2005

Abstract:

New-Keynesian (NK) models can only account for the dynamic effects of monetary policy shocks if it is assumed that aggregate capital accumulation is much smoother than it would be the case under frictionless firm-level investment, as discussed in Woodford (2003, Ch. 5). We find that lumpy investment, when combined with price stickiness and market power of firms, can rationalize this assumption. Our main result is in stark contrast with the conclusions obtained by Thomas (2002) in the context of a real business cycle (RBC) model. We use our model to explain the economic mechanism behind this difference in the predictions of RBC and NK theory.

Keywords:

Lumpy Investment, Sticky Prices

JEL codes:

E22, E31, E32

Area of Research:

Macroeconomics and International Economics

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