An Empirical Study of Interaction-Based Aggregate Investment Fluctuations

This paper argues that interactions of firms account for a sizable part of fluctuations in aggregate investments without exogenous aggregate shocks. We first establish empirically that the fraction of firms that engage in a lumpy investment follows a non-normal, two-sided exponential distribution across region-year with a panel data set of Italian firms. We then present a simple sectoral model that generates the two-sided exponential distribution that arises from the complementarity of the firms’ lumpy investments within a region. Calibrated by the firm-level estimate of complementarity, the model is capable of generating the two-sided exponential fluctuations observed at the aggregate level.