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Partial Adjustment Without Apology

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  • Robert G. King
  • Julia K. Thomas

Abstract

Econometric partial adjustment models perform relatively well at the aggregate level; however, many kinds of microeconomic behavior involve discrete and occasional choices. Analyzing the classic employment adjustment problem, we show how a generalized partial adjustment model tractably accommodates both observations by aggregating the actions of heterogeneous producers facing fixed adjustment costs. Aggregate disturbances cause changes in establishment-level target employment and in the measure of establishments actively adjusting to their target, whereas aggregate responses exhibit partial adjustment. Our framework also can be applied in general equilibrium settings with persistent idiosyncratic shocks without forfeiting the convenient use of linear solution methods. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Robert G. King & Julia K. Thomas, 2006. "Partial Adjustment Without Apology," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 779-809, August.
  • Handle: RePEc:ier:iecrev:v:47:y:2006:i:3:p:779-809
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
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    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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