Discounting: Investment Sensitivity and Aggregate Implications
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Overview
abstract
This paper studies the effects of discounting on plant-level and aggregate investment. We study a number of date based processes to represent the state dependent discount factor. Empirically, the stochastic discount factor is procyclical. The investment decision at the plant level is sensitive to the specification of the stochastic discount factor. Non-convexities in adjustment costs at the plant level have aggregate implications: lumpy investment is not smoothed.
