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Dynamic (S,s) Economies

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  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

Abstract

In this paper we provide a framework to study the aggregate dynamic behavior of an economy where individual units follow (S,s) policies. We characterize structural and stochastic heterogeneities that ensure convergence of the economy's aggregate to that of its frictionless counterpart, determine the speed at which convergence takes place, and describe the transitional dynamics of this economy. In particular, we consider a dynamic economy where agents differ in their initial positions within their bands and face both stochastic and structural heterogeneity; where the former refers to the presence of (unit specific) idiosyncratic shocks, and the latter to differences in the widths of units' (S,s) bands and their response to aggregate shocks. We study the evolution of the economy's aggregate and the evolution of the difference between this aggregate and that of an economy without macroeconomic friction, where the latter pertains to a situation where individual units adjust with no delay to all shocks. We also examine the sensitivity of this difference to common shocks. For example, in the retail inventory problem the aggregate deviation and sensitivity to common shocks correspond to the aggregate inventory level and its sensitivity to aggregate demand shocks, respectively.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3734.

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Date of creation: Jun 1991
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Publication status: published as Econometrica, November 1991,pp. 1659-1686
Handle: RePEc:nbr:nberwo:3734

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  1. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1395-1409, November.
  2. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(4), pages 703-25, November.
  3. repec:fth:coluec:448 is not listed on IDEAS
  4. Akerlof, George A, 1979. "Irving Fisher on His Head: The Consequences of Constant Threshold-Target Monitoring of Money Holdings," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 169-87, May.
  5. Benabou, Roland, 1987. "Optimal price dynamics and speculation with a storable good," CEPREMAP Working Papers (Couverture Orange) 8708, CEPREMAP.
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