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.
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Volume (Year): 2 (1995)
Issue (Month): 7 ()
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