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The Macroeconomics of Partial Irreversibility

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  • Isaac Baley
  • Andrés Blanco
Abstract
We investigate the macroeconomic effects of partially irreversible investment arising from a wedge between the buying and selling price of capital. We derive sufficient statistics that characterize the implications of irreversibility for three long-run macroeconomic outcomes- capital allocation, capital valuation, and capital fluctuations. Measuring these statistics with investment microdata, we find that irreversibility distorts the allocation of capital, lowers capital valuation, and increases the persistence of capital fluctuations. Corporate income tax cuts, by lowering the deductibility of capital losses due to the price wedge, effectively increase irreversibility and structurally change long-run capital behavior.

Suggested Citation

  • Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Partial Irreversibility," Working Papers 1312, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1312
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    File URL: https://bse.eu/sites/default/files/working_paper_pdfs/1312.pdf
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    More about this item

    Keywords

    investment frictions; fixed adjustment costs; irreversibility; lumpiness; capital misallocation; Tobin's q; transitional dynamics; inaction; propagation; corporate taxes;
    All these keywords.

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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