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The Linear Quadratic Adjustment Cost Model and the Demand for Labour


  • Engsted, Tom
  • Haldrup, Niels


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.

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  • Engsted, Tom & Haldrup, Niels, 1994. "The Linear Quadratic Adjustment Cost Model and the Demand for Labour," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages 145-159, Suppl. De.
  • Handle: RePEc:jae:japmet:v:9:y:1994:i:s:p:s145-59

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    References listed on IDEAS

    1. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    2. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    4. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, vol. 76(3), pages 314-334, June.
    5. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    6. Brock, William A. & Sayers, Chera L., 1988. "Is the business cycle characterized by deterministic chaos?," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 71-90, July.
    7. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-328, April.
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    Cited by:

    1. David Aristei & Luca Pieroni, 2010. "Habits, Complementarities and Heterogeneity in Alcohol and Tobacco Demand: A Multivariate Dynamic Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(4), pages 428-457, August.
    2. Pål Boug & Ådne Cappelen & Anders R. Swensen, 2000. "Expectations in Export Price Formation Tests using Cointegrated VAR Models," Discussion Papers 283, Statistics Norway, Research Department.
    3. Fanelli, Luca, 2006. "Multi-equational linear quadratic adjustment cost models with rational expectations and cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 445-456, March.
    4. Cuthbertson, Keith, 1996. "The Expectations Hypothesis of the Term Structure: The UK Interbank Market," Economic Journal, Royal Economic Society, vol. 106(436), pages 578-592, May.
    5. Paul Mizen & Anindya Banerjee, 2006. "A re-interpretation of the linear quadratic model when inventories and sales are polynomially cointegrated," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1249-1264.
    6. Ingvild Svendsen, 1998. "Rational Expectations in Price Setting. Tests Based on Norwegian Export Prices," Discussion Papers 226, Statistics Norway, Research Department.
    7. Fanelli, Luca, 2007. "Present Value Relations, Granger Noncausality, And Var Stability," Econometric Theory, Cambridge University Press, vol. 23(06), pages 1254-1260, December.
    8. Matteo Manera, 2006. "Modelling factor demands with SEM and VAR: an empirical comparison," Journal of Productivity Analysis, Springer, vol. 26(2), pages 121-146, October.
    9. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-355, July.
    10. Pål Boug, 1999. "The Demand for Labour and the Lucas Critique. Evidence from Norwegian Manufacturing," Discussion Papers 256, Statistics Norway, Research Department.
    11. Johansen, Soren & Swensen, Anders Rygh, 1999. "Testing exact rational expectations in cointegrated vector autoregressive models," Journal of Econometrics, Elsevier, vol. 93(1), pages 73-91, November.
    12. Gil-Alana, L.A., 2008. "Testing of seasonal integration and cointegration with fractionally integrated techniques: An application to the Danish labour demand," Economic Modelling, Elsevier, vol. 25(2), pages 326-339, March.
    13. Fanelli, Luca, 2002. "A new approach for estimating and testing the linear quadratic adjustment cost model under rational expectations and I(1) variables," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 117-139, January.

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