nonconvexities, it can also be accounted for by a skewed distribution of idiosyncratic shocks. Another way of exploring capital adjustment patterns is to examine whether the likelihood of an investment episode increases or decreases with the time elapsed since the last investment episode, by estimating an investment hazardfunction.
In general, it is difficult to make very precise statements about the shape of the hazardfunction without specifying the details of the model, including assumptions about the form of depreciation, the composition of capital goods and the
the average duration of a fiscal adjustment is slightly above one year.
Survival Analysis Methodology
The duration data used in this study can be summarized using three variables: the hazard rate, the survival rate, and the cumulative failure rate. The unconditional hazardfunction expresses the relative risk that a fiscal consolidation ends at time t , provided it was still ongoing in the previous period. The hazardfunction ( Kaplan and Meier, 1958 ) is calculated as follows:
h ^ ( t ) = d t n t , ( 1 )
where d t represents the number of
This paper examines capital adjustment patterns using two large and largely novel data sets from the manufacturing sectors of Colombia and Mexico. The findings show that investment patterns in these countries resemble those reported for the United States to a surprising extent. Capital adjustments beyond maintenance investment occur only rarely, but large spikes account for a significant fraction of total investment. Although duration models do not provide strong evidence for the presence of substantial fixed costs, nonparametric adjustment function estimates reveal the presence of irreversibilities in investment. These irreversibilities are important for understanding aggregate investment behavior.
A large body of empirical research supports the notion that healthy budgetary balances are, over the long run, good for growth (Easterly, Rodriguez, and Schmidt-Hebbel, 1994). The effect of fiscal consolidation on growth in the short run, however, remains open to question as a number of studies—largely for industrial countries—have drawn the conclusion that under some circumstances fiscal contractions can stimulate growth.1 A central theme in these works is that the composition of fiscal adjustment plays a key role in determining whether fiscal contractions lead to higher growth and are also sustainable over time. These studies show that improving fiscal positions through the rationalization of the government wage bill and public transfers, rather than increasing revenues and cutting public investment, can foster higher growth even in the short run.