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When does lumpy factor adjustment matter for aggregate dynamics?

  • Fahr, Stephan
  • Yao, Fang

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

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Paper provided by European Central Bank in its series Working Paper Series with number 1016.

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Date of creation: Mar 2009
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Handle: RePEc:ecb:ecbwps:20091016
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