Aggregate Dynamics in Lumpy Economies

• Authors: Isaac Baley.
• macroeconomics
• Econometrica

How does an economy’s capital respond to aggregate productivity shocks whenfirms make lumpy investments? We show that capital’s transitional dynamics are structurally linked to two steady-state moments: the dispersion of capital to productivity ratios—an indicator of capital misallocation—and the covariance of capital to productivity ratios with the time elapsed since their last adjustment—an indicator of asymmetric costs of upsizing and downsizing the capital stock. We compute these two suffcient statistics using data on the size and frequency of investment of Chilean plants. The empirical values indicate significant effects of aggregate productivity shocks and favor investment models with a strong downsizing rigidity and random opportunities for free adjustments.