Adjustment costs and investment in a stochastic endogenous growth model

This paper introduces costly investment into a stochastic equilibrium macro model. Investment is determined by an endogenously determined Tobin-q that depends upon the structural parameters of the economy. The model permits a sequence of economies, allowing for an increasing role of government, to be studied. The effects of both a structural change, taking the form of a higher variance of productivity shocks, and fiscal policy on the equilibrium is analyzed, paying particular attention to the impact on the growth rate and its variability. The role of the Tobin-q in determining the response of the mean growth rate and its variance is emphasized.