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  3. American Economic Review
  4. September 1999
  5. Machine Replacement and the Business Cycle: Lumps and Bumps

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Machine Replacement and the Business Cycle: Lumps and Bumps

  • Russell Cooper
  • John Haltiwanger
  • Laura Power
American Economic Review
vol. 89, no. 4, September 1999
(pp. 921–946)
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Abstract

This paper explores investment fluctuations due to discrete changes in a plant's capital stock. The resulting aggregate investment dynamics are surprisingly rich, reflecting the interaction between a replacement cycle, the cross-sectional distribution of the age of the capital stock, and an aggregate shock. Using plant-level data, lumpy investment is procyclical and more likely for older capital. Further, the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well. However, ignoring fluctuations in the cross-sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment.

Citation

Cooper, Russell, John Haltiwanger, and Laura Power. 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps." American Economic Review 89 (4): 921–946. DOI: 10.1257/aer.89.4.921

JEL Classification

  • E32 Business Fluctuations; Cycles
  • E22 Capital; Investment; Capacity