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When does lumpy factor adjustment matter for aggregate dynamics?

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  • Fahr, Stephan
  • Yao, Fang

Abstract

We analyze the dynamic e¤ects of lumpy factor adjustments at the firm level onto the aggregate economy. We find that distinguishing between capital and labour as lumpy factors within the production function result in very dfferent dynamics for aggregate output, investment and labour in an otherwise standard real business cycle model. Lumpy capital leaves the RBC mainly unchanged, while lumpy labour allows for persistence and an inner propagation within the model in form of hump-shaped impulse repsonses. In addition, when modeling lumpy adjustments on both investment and labour, the aggregate effects are even stronger. We investigate the mechanisms underlying these results and identify the elasticity of factor supply as the most important element in accounting for these differences. JEL Classification: E32, E22, E24

Suggested Citation

  • Fahr, Stephan & Yao, Fang, 2009. "When does lumpy factor adjustment matter for aggregate dynamics?," Working Paper Series 1016, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091016
    Note: 373346
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1016.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    business cycles; Elasticity of; Lumpy investment; Lumpy labor adjustment;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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