The relevance of lumpy investment at plant-level due to non-convex fixed capital adjustment cost has been a hot topic under debate. Based on partial equilibrium analyses, a series of studies have pointed out lumpy investments in response to exogenous shocks have significant aggregate implications for the business cycles. Yet Khan and Thomas challenged this claim recently by showing robust irrelevance results in general equilibrium. They attributed this high similarity to the fully offsetting effect from procyclical equilibrium price movements caused by the large fluctuations of investment demand. In this thesis, I extend the closed economy state-dependent adjustment model to open economies and show that in an analytically tractable two-country model in which both countries can be fully...[ Read more ]

The relevance of lumpy investment at plant-level due to non-convex fixed capital adjustment cost has been a hot topic under debate. Based on partial equilibrium analyses, a series of studies have pointed out lumpy investments in response to exogenous shocks have significant aggregate implications for the business cycles. Yet Khan and Thomas challenged this claim recently by showing robust irrelevance results in general equilibrium. They attributed this high similarity to the fully offsetting effect from procyclical equilibrium price movements caused by the large fluctuations of investment demand. In this thesis, I extend the closed economy state-dependent adjustment model to open economies and show that in an analytically tractable two-country model in which both countries can be fully risk-sharing, notable distinctions between the lumpy investment models and the benchmark models reappear in general equilibrium. This is because the equilibrium price feedbacks are weakened in open economies through the international reallocation of capital. And I also find that there is a trade-off between the interest rate feedback and wage rate feedback in the respect of relative significance. This can help further understanding the impacts of lumpy investment on the business cycles.