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Costly Adjustment under Rational Expectations: A Generalization

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  • Pesaran, M Hashem

Abstract

This note provides a generalization of the standard adjustment cost-rational expectations model due to Sargent (1978), which, in addition to the cost of changing the level of the decision variable, also allows for the cost of altering the "speed" with which decisions are changed. It establishes the existence of a unique stable solution for this more general model, derives an explicit solution for the underlying decision problem, and provides a necessary order condition for identification of the structural parameters. The note also contains an application of the model to the determination of employment in the U.K. coal industry over the 1956-83 period. Copyright 1991 by MIT Press.

Suggested Citation

  • Pesaran, M Hashem, 1991. "Costly Adjustment under Rational Expectations: A Generalization," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 353-358, May.
    • Handle: RePEc:tpr:restat:v:73:y:1991:i:2:p:353-58
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    Cited by:

    1. Richard Black & David Rose, 1997. "Canadian Policy Analysis Model: CPAM," Staff Working Papers 97-16, Bank of Canada.
    2. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 3-18, February.
    3. Tinsley, P A, 2002. "Rational Error Correction," Computational Economics, Springer;Society for Computational Economics, vol. 19(2), pages 197-225, April.
    4. Fujiwara, Ippei & Hara, Naoko & Hirose, Yasuo & Teranishi, Yuki, 2005. "The Japanese Economic Model (JEM)," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(2), pages 61-142, May.
    5. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
    6. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
    7. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    8. Smith, Ron P. & Zoega, Gylfi, 2008. "Global Factors, Unemployment Adjustment and the Natural Rate," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-29.
    9. Valerie Herzberg & George Kapetanios & Simon Price, 2003. "Import prices and exchange rate pass-through: theory and evidence from the United Kingdom," Bank of England working papers 182, Bank of England.
    10. Sienknecht, Sebastian, 2016. "Reassessing price adjustment costs in DSGE models," MPRA Paper 73763, University Library of Munich, Germany.
    11. Hunt, Benjamin & Rose, David & Scott, Alasdair, 2000. "The core model of the Reserve Bank of New Zealand's Forecasting and Policy System," Economic Modelling, Elsevier, vol. 17(2), pages 247-274, April.
    12. Binder, Michael & Pesaran, Hashem, 2000. "Solution of finite-horizon multivariate linear rational expectations models and sparse linear systems," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 325-346, March.

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