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Nonconvex factor adjustments in equilibrium business cycle models: Do nonlinearities matter?

Author

Listed:
  • Aubhik Khan
  • Julia K. Thomas
Abstract
Recent empirical analysis has found nonlinearities to be important in understanding aggregated investment. Using an equilibrium business cycle model, we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. We find that, while such costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. Our finding, based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity, is robust to the introduction of shocks to the relative price of investment goods.

Suggested Citation

  • Aubhik Khan & Julia K. Thomas, 2002. "Nonconvex factor adjustments in equilibrium business cycle models: Do nonlinearities matter?," Staff Report 306, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:306
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Keywords

    Econometric models; Business cycles; Equilibrium (Economics);
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