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Fixed adjustment costs and aggregate fluctuations

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  • Elsby, Michael W.L.
  • Michaels, Ryan

Abstract

This paper studies the analytics of a canonical model of lumpy microeconomic adjustment. We provide a novel characterization of the implied aggregate dynamics. In general, the distribution of firm outcomes follows a simple and intuitive law of motion that links aggregate outcomes to rates of adjustment. Analytical approximations reveal, however, that the aggregate dynamics are approximately invariant to a relevant range of adjustment costs. This neutrality is an aggregation result that emerges from a symmetry property in the distributional dynamics, independent of market equilibrium considerations. Quantitative illustrations confirm these results for parameterizations used in the employment and price adjustment literatures.

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  • Elsby, Michael W.L. & Michaels, Ryan, 2019. "Fixed adjustment costs and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 128-147.
    • Handle: RePEc:eee:moneco:v:101:y:2019:i:c:p:128-147
    DOI: 10.1016/j.jmoneco.2018.07.008
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    More about this item

    Keywords

    Lumpy microeconomic adjustment; Ss model; Cross-sectional dynamics; Aggregate employment dynamics;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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