Endogenous Fluctuations of Investment and Output in a Model of Discrete Capital Adjustments

Abstract

This paper presents a model of endogenous fluctuations of investment and output at the business cycles frequencies. Aggregate investments fluctuate endogenously due to the strategic complementarity of micro-level lumpy investments. The investment fluctuations are transmitted to the output via variable utilization of capital. Simulations show that there is a range of parameter values under with the model economy exhibits a large magnitude of fluctuations and comovements in investment and output.business cycles, lumpy investment, variable capacity utilization, nonlinear dynamics