State Dependent Adjustment in an Economy with Seasonal Fluctuations

Gil Mehrez
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Gil Mehrez: Georgetown University

Macroeconomics from University Library of Munich, Germany

Abstract: Much research on the dynamics of the aggregate economy concerns the adjustment policy of the microeconomic units. This paper investigates the optimal adjustment policy when there are seasonal fluctuations and fixed adjustment costs. The optimal policy in this case can be described in terms of three parameters: the thresholds where adjustment occurs during the high season; the thresholds where adjustment occurs during the low season; and the deviation at the end of each season. Since the optimal level of the control variable (e.g., price, employment, stock of capital) decreases during the low season and increases during the high season, the optimal policy is such that at the end of the high season the control variable is below its optimal level and at the end of the low season the control variable is above its optimal level. As a result, the observed seasonal fluctuations are smaller than the underlying seasonal fluctuations. This damping effect depends on the trend of the process. When the trend is higher in absolute value, the deviation at the beginning of each season decreases and hence the observed seasonal fluctuations increase. For example, if the control variable is the price the firm charges, higher inflation increases the seasonal fluctuations. I test this prediction for the case of price seasonality using price data from Israel for the period 1983-1994. The data provide strong support to the model prediction. Price seasonality increases with the rate of inflation. This is the case especially for goods with market power and significant adjustment costs.

JEL-codes: E22 E23 E24 E31 E32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 1996-09-25
Note: Type of Document - WordPerfect; prepared on IBM PC ; to print on HP; pages: 23 ; figures: included .
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Citations: View citations in EconPapers (2)

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