Interpreting adjustment cost effects under asymmetry: a note
This paper examines the Pfann and Verspagen specification for asymmetric adjustment cost. We show that under asymmetry, the coefficient for the linear-quadratic term understates the symmetric part of adjustment cost. The analysis reveals that a positive value for this parameter is sufficient but not necessary for a well-behaved adjustment cost function. The specification satisfies all the requirements when the linear-quadratic coefficient equals zero. We also derive a condition for a well-behaved adjustment cost function within a feasible region when the parameter has negative sign. Since our study expands the range of permissible parameter values, it increases the empirical applicability of the asymmetric adjustment cost function.
Volume (Year): 2 (1995)
Issue (Month): 7 ()
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