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How non-traded goods may generate quasi-quadratic costs for capital adjustment

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  • Phillips, Kerk L.

Abstract

This paper shows that a two-tiered production structure with both traded and non-traded intermediate goods and non-traded final goods can generate a cost of capital adjustment that is very similar to the quadratic adjustment cost often assumed in single good macroeconomic models. This implies that while a quadratic loss function may seem like an ad hoc adjustment, it can be rationalized by sound theory from a more detailed model.

Suggested Citation

  • Phillips, Kerk L., 2015. "How non-traded goods may generate quasi-quadratic costs for capital adjustment," Economics Letters, Elsevier, vol. 127(C), pages 24-26.
    • Handle: RePEc:eee:ecolet:v:127:y:2015:i:c:p:24-26
    DOI: 10.1016/j.econlet.2014.12.028
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    References listed on IDEAS

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    More about this item

    Keywords

    Nontraded goods; Adjustment costs; Quadratic; Capital accumulation;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F10 - International Economics - - Trade - - - General
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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