10.1184/R1/6703763.v1
Miguel Casares
Miguel
Casares
Bennett T. McCallum
Bennett T.
McCallum
An Optimizing IS-LM Framework with Endogenous Investment
Carnegie Mellon University
2007
Business
Management
2007-10-01 00:00:00
Journal contribution
https://kilthub.cmu.edu/articles/journal_contribution/An_Optimizing_IS-LM_Framework_with_Endogenous_Investment/6703763
Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have
been used for much recent monetary policy analysis, but usually with capital and investment treated
as exogenous—a significant restriction. This paper demonstrates that investment decisions can be
endogenized without undue complexity in such models and that these can be calibrated to provide
reasonably realistic dynamic behavior. It is necessary, however, to include capital adjustment costs;
models with no adjustment costs match cyclical data very poorly. Indeed, their match is considerably
poorer than models with constant capital. The paper also finds that the preferred adjustment-cost
specification is not close to quadratic.