The Linear Quadratic Adjustment Cost Model and the Demand for Labour

Tom Engsted and Niels Haldrup ()

Journal of Applied Econometrics, 1994, vol. 9, issue S, S145-59

Abstract: In this paper we demonstrate a new way of testing the linear quadratic adjustment cost (LQAC) model under rational expectations. We illustrate how the parameter restrictions arising from this model can be formally specified and we use these restrictions to extend the technique of Campbell and Shiller (1987) to a wider class of models based on present value relations. Potentially the demand for labour is an area in which the LQAC model can find applicability in practice and subsequently we analyse sectoral labour demand in Danish manufacturing. We find, however, that for our data set the quadratic adjustment cost model under rational expectations can be rejected. Copyright 1994 by John Wiley & Sons, Ltd.

Date: 1994
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