Investment cycles

The US aggregate fixed investment to output ratio is among the most periodic economic time series. The average duration of the cycle is about 7 yr, and the power of its spectral density is highly concentrated. One possible explanation for this is the long period required for the production of fixed capital. When fixed capital takes many periods of time to build, it generates persistent demand for investment goods. Such persistent demand for investment goods is a powerful force behind economic fluctuations. A traditional time-to-build model developed by Kydland and Prescott is unable to explain such investment cycles because of its failure to capture the demand-side effect of time to build. This paper presents a general equilibrium model emphasizing such a demand-side effect that seems to account for much of the cyclical properties of the data. (C) 1998 Elsevier Science B.V. All rights reserved.