Staff Report 306

Nonconvex Factor Adjustments in Equilibrium Business Cycle Models: Do Nonlinearities Matter?

Julia Thomas
Aubhik Khan

Published May 1, 2002

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.

Published In: Journal of Monetary Economics (Vol. 50, No. 2, March 2003, pp. 331-360)

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