Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/150269
Authors: 
Nirei, Makoto
Year of Publication: 
2015
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 10 [Year:] 2015 [Issue:] 3 [Pages:] 953-985
Abstract: 
This study demonstrates that the interactions of firm-level indivisible investments give rise to aggregate fluctuations without aggregate exogenous shocks. When investments are indivisible, aggregate capital is determined by the number of firms that invest. I develop a method to derive the closed-form distribution of the number of investing firms when each firm's initial capital level varies stochastically. This method shows that idiosyncratic shocks may lead to non-vanishing aggregate fluctuations when the number of firms tends to infinity. I incorporate this mechanism in a dynamic general equilibrium model with indivisible investment and predetermined goods prices. The model features no aggregate exogenous shocks, and the fluctuation is driven by idiosyncratic productivity shocks. Numerical simulations show that the model generates aggregate fluctuations comparable to the business cycles in magnitude and correlation structure under standard calibration.
Subjects: 
Business cycle
strategic complementarity
idiosyncratic shock
law of large numbers
criticality
power law
JEL: 
E22
E32
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc/3.0/
Document Type: 
Article

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