Time-To-Build and Convex Adjustment Costs

January 1, 2001

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Petya Koeva Brooks. Time-To-Build and Convex Adjustment Costs, (USA: International Monetary Fund, 2001) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper incorporates time-to-build into the standard investment model with convex adjustment costs. The empirical Euler equation is estimated using a U.S. firm-level panel from Compustat. In spite of the introduction of time-to-build, the magnitude of the implied adjustment costs is unrealistically high. Exploiting another approach, I test directly the restrictions imposed by time-to-build on the investment equation. The results indicate that these restrictions cannot be rejected for five of the sixteen industries in the sample. Finally I show that time-to-build can explain approximately one-third of the variation in persistence of structure investment across four-digit industries.

Subject: Bonds, Econometric analysis, Economic sectors, Estimation techniques, Financial institutions, Manufacturing, National accounts, Stocks, Transportation

Keywords: Bonds, Capital stock, Compustat firm, Estimation techniques, Investment, Investment equation, Investment literature, Investment model, Investment path, Investment persistence, Investment process, Investment rate, Manufacturing, Optimization problem, Stocks, Structural equation, Time-to-build, Transportation, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/009
Stock No:

WPIEA0092001
ISBN:

9781451842593
ISSN:

1018-5941

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