Fixed Adjustment Costs and Aggregate Fluctuations

Ryan Michaels and Michael Elsby
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Ryan Michaels: University of Rochester

No 679, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the analytics of a canonical model of fixed adjustment costs in the presence of idiosyncratic productivity shocks. We provide a novel analytical characterization of the steady state and dynamics of aggregate outcomes implied by the model. The dynamics are shown to have an intuitive partial-adjustment representation. These results are then used to derive a set of approximations to model outcomes in the presence of a small adjustment cost. Surprisingly, these reveal that both aggregate steady-state outcomes and aggregate dynamics are approximately neutral with respect to a small fixed adjustment cost. We show that this neutrality result emerges from a symmetry property in the distributional dynamics of the model, and arises even in the absence of general equilibrium adjustment of prices. A set of quantitative illustrations confirms these analytical results for parameterizations commonly used in the literature on employment adjustment.

Date: 2012
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Journal Article: Fixed adjustment costs and aggregate fluctuations (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:679

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