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Fixed Adjustment Costs and Aggregate Fluctuations

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  • Ryan Michaels

    (University of Rochester)

  • Michael Elsby

    (University of Edinburgh)

Abstract

This paper studies the analytics of a canonical model of fixed adjustment costs in the presence of idiosyncratic productivity shocks. We provide a novel analytical characterization of the steady state and dynamics of aggregate outcomes implied by the model. The dynamics are shown to have an intuitive partial-adjustment representation. These results are then used to derive a set of approximations to model outcomes in the presence of a small adjustment cost. Surprisingly, these reveal that both aggregate steady-state outcomes and aggregate dynamics are approximately neutral with respect to a small fixed adjustment cost. We show that this neutrality result emerges from a symmetry property in the distributional dynamics of the model, and arises even in the absence of general equilibrium adjustment of prices. A set of quantitative illustrations confirms these analytical results for parameterizations commonly used in the literature on employment adjustment.

Suggested Citation

  • Ryan Michaels & Michael Elsby, 2012. "Fixed Adjustment Costs and Aggregate Fluctuations," 2012 Meeting Papers 679, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:679
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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