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  • P-ISSN 2586-2995
  • E-ISSN 2586-4130
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KDI Journal of Economic Policy. Vol. 44, No. 1, February 2022, pp. 77-98

https://doi.org/10.23895/kdijep.2022.44.1.77

× KDI Open Access is a program of fully open access journals to facilitate the widest possible dissemination of high-quality research. All research articles published in KDI JEP are immediately, permanently and freely available online for everyone to read, download and share in terms of the Creative Commons Attribution 4.0 International License.

Investment and Business Cycles: Focusing on Firms’ Capital Adjustment Costs

CHANGWOO NAM

Author & Article History

Manuscript received 19 October 2021; revision received 25 October 2021; accepted 13 December 2021.

Abstract

This paper empirically verifies that the types of capital adjustment costs serve as an important mechanism in relation to investment decision-making after confirming that the investment dispersion of Korean firms is pro-cyclical and can affect business cycles. Specifically, it is found through empirical methods using corporate financial data that capital adjustment costs generally assumed to take a quadratic form in macroeconomics are asymmetric and irreversible in the Korean economy. In particular, capital adjustment costs are empirically proven to cause investment dispersion to expand given that the substitution effect of the marginal value to the marginal cost for one unit of investment in the inter-temporal investment decision is affected by that cost with regard to the resale of owned equipment assets, as opposed to new investments in equipment assets. We ultimately show, albeit indirectly, that investment dispersion can affect business cycles as capital adjustment costs influences investment decisions. What is implied is that the capital adjustment cost is not merely an exogenously deep parameter that fits the dynamics of business cycles in a macroeconomic model but could instead be a policy variable that can be endogenized through government policies.

Keywords

Investment, Business Cycles, Capital Adjustment Costs, GMM

JEL Code

C58, D24, D25

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