This paper provides a dynamic optimization model of durable goods inventories to study the interactions between investment demand and the production of capital goods. There are three major findings: first, capital suppliers¡¯ inventory behavior makes investment demand more volatile in...

The causal relationship between growth and fixed capital formation is reexamined. Our findings are in sharp contrast with the earlier findings by Blomstrom et al. (1996) that capital formation does not contribute to economic growth. However, our findings also reject the conventional wisdom...

The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates forecast booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore...

This paper shows that uninsured risk and borrowing constraints can make an individual's marginal propensity to consume negatively dependent on his/her permanent income. Therefore, higher income growth can lead to higher saving rates without requiring (or causing) high interest rates – in sharp...