INVESTMENT CYCLES

The US aggregate fixed investment to output ratio is among the most pe riodic economic time series. The average duration of the cycle is abou t 7 yr, and the power of its spectral density is highly concentrated. One possible explanation for this is the long period required for the production of fixed capital. When fixed capital takes many periods of time to build, it generates persistent demand for investment goods. Su ch persistent demand for investment goods is a powerful force behind e conomic fluctuations. A traditional time-to-build model developed by K ydland and Prescott is unable to explain such investment cycles becaus e of its failure to capture the demand-side effect of time to build. T his paper presents a general equilibrium model emphasizing such a dema nd-side effect that seems to account for much of the cyclical properti es of the data. (C) 1998 Elsevier Science B.V. All rights reserved.