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Learning about others actions and the investment accelerator

Acemoglu, Daron (1992) Learning about others actions and the investment accelerator. CEP discussion paper, 72. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

A General Equilibrium model of investment is constructed in which the pay-offs of firms depend on each other''s actions. It is shown that when these actions are unobservable but aggregate output is in the information set of the agents; it acts as a signal. The implication is that output will lead investment over the business cycle. This gives a theory of the Rational Expectations Investment Accelerator. Learning also changes the cyclical behaviour of the endogenous variables and leads to a loss of output and efficiency. The inefficiency depends on the amount of noise in the system thus reducing fluctuations can have first-order welfare effects. It is also shown that the introduction of a stock market will not alter the qualitative conclusion of the paper. The intuition of this paper for the investment accelerator also suggests that an "employer accelerator" might exist. An economic investigation of the US and UK data gives support to these accelerators. Also, the model predicts, investment is less responsive to output when its conditional variance is higher.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 1992 Daron Acemoglu
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 72
Date Deposited: 21 Aug 2008 08:50
URL: http://eprints.lse.ac.uk/21051/

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