Investment Behavior in Dynamic Computable General Equilibrium Models for Transition Economies
Kiel Working Paper No. 879
37 Pages Posted: 20 Feb 2001
Date Written: September 1998
This paper suggests a method of approximating the development of investment in transition economies through an amendment of the standard adjustment cost formulation for investment within dynamic Computable General Equilibrium (CGE) models. Letting adjustment cost depend on the difference between the investment levels of two periods (rather than only on the gross investment ratio) leads to an investment behavior of the representative household that resembles the observed time paths of investment in transition countries. In contrast to standard adjustment costs, which predict a sharp rise in investment due to the high marginal productivity of each unit of capital after a capital shock, augmented adjustment costs lead to a gradual rise in investment.
Keywords: Computable General Equilibrium Model, Transition, Adjustment Costs, Investment Behavior
JEL Classification: D58, P20
Suggested Citation: Suggested Citation