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

Abstract

Using an equilibrium business cycle model, the authors search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs. The authors find that while such adjustment costs lead to nontrivial nonlinearities in aggregate investment demand, equilibrium investment is effectively unchanged. This 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.Business cycles