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A Fallacy of Composition

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Caballero, Ricardo J

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Abstract

The representative-agent framework has endowed macroeconomists with powerful microeconomic tools. Unfortunately, it has also blurred the distinction between statements that are valid at the individual level and those that apply to the aggregate. In this paper, the author argues that probability theory puts strong restrictions on the joint behavior of a large number of units that are less than fully synchronized. Many fallacies arise from disregarding these restrictions. For example, asymmetric factor adjustment costs at the firm level need not imply asymmetric responses of aggregate employment flows to positive and negative shocks. Copyright 1992 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 82 (1992)
Issue (Month): 5 (December)
Pages: 1279-92
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Handle: RePEc:aea:aecrev:v:82:y:1992:i:5:p:1279-92

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Tsiddon, Daniel, 1991. "On the Stubbornness of Sticky Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 69-75, February. [Downloadable!] (restricted)
  3. Kuran, Timur, 1983. "Asymmetric Price Rigidity and Inflationary Bias," American Economic Review, American Economic Association, vol. 73(3), pages 373-82, June. [Downloadable!] (restricted)
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