The Asset Price and Investment Technology

This paper evaluates the importance of investment installment costs in a sticky price model by comparing two different adjustment cost specification:one depends upon investment-to-capital stock ratio, and the other depends upon investment growth. The two specifications are considered since the former has been adopted in the empirical literatures and the latter has been adopted in the theoretical literatures. The adjustment cost specifications affects the relationship between asset price and value of capital stock, and also the dynamic process of investment and output. When the installment cost depends upon the investment growth, there is a stronger positive asset price response to a positive technology shock. In addition the investment growth specification generates a hump-shaped response of investment and output, that is frequently observed in the empirical literatures.