https://macropaperwarehouse.com/authors/andres-blanco/Andrés BlancoHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-macroeconomics-of-irreversibility/https://macropaperwarehouse.com/papers/the-macroeconomics-of-irreversibility/<p><strong>Research question.</strong> How does partial capital irreversibility — arising from a wedge between the purchase price and the resale (discounted) price of capital — shape the persistence and amplitude of aggregate capital fluctuations? And what is the quantitative magnitude of the capital price wedge that is needed to simultaneously reconcile micro-level investment behavior with macroeconomic propagation?</p> <p><strong>Methodology.</strong> Baley and Blanco build a continuous-time investment model for a continuum of firms facing (i) idiosyncratic productivity shocks (geometric Brownian motion), (ii) fixed capital adjustment costs proportional to productivity, and (iii) a capital price wedge ω, under which firms buy capital at price p and sell at p(1−ω). The key state variable is the log capital-productivity ratio k̂. The optimal policy takes the form of an inaction region with two distinct reset points — one for upsizing (k̂*₋) and one for downsizing (k̂*₊) — instead of the single reset point that arises without the wedge.</p>