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State Dependent Adjustment in an Economy with Seasonal Fluctuations

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  • Gil Mehrez

    (Georgetown University)

Abstract

Much research on the dynamics of the aggregate economy concerns the adjustment policy of the microeconomic units. This paper investigates the optimal adjustment policy when there are seasonal fluctuations and fixed adjustment costs. The optimal policy in this case can be described in terms of three parameters: the thresholds where adjustment occurs during the high season; the thresholds where adjustment occurs during the low season; and the deviation at the end of each season. Since the optimal level of the control variable (e.g., price, employment, stock of capital) decreases during the low season and increases during the high season, the optimal policy is such that at the end of the high season the control variable is below its optimal level and at the end of the low season the control variable is above its optimal level. As a result, the observed seasonal fluctuations are smaller than the underlying seasonal fluctuations. This damping effect depends on the trend of the process. When the trend is higher in absolute value, the deviation at the beginning of each season decreases and hence the observed seasonal fluctuations increase. For example, if the control variable is the price the firm charges, higher inflation increases the seasonal fluctuations. I test this prediction for the case of price seasonality using price data from Israel for the period 1983-1994. The data provide strong support to the model prediction. Price seasonality increases with the rate of inflation. This is the case especially for goods with market power and significant adjustment costs.

Suggested Citation

  • Gil Mehrez, 1996. "State Dependent Adjustment in an Economy with Seasonal Fluctuations," Macroeconomics 9609006, EconWPA.
  • Handle: RePEc:wpa:wuwpma:9609006
    Note: Type of Document - WordPerfect; prepared on IBM PC ; to print on HP; pages: 23 ; figures: included .
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    References listed on IDEAS

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    1. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
    2. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
    3. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
    4. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    5. Van Hoomissen, Theresa, 1988. "Price Dispersion and Inflation: Evidence from Israel," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1303-1314, December.
    6. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    7. J. Joseph Beaulieu & Jeffrey K. MacKie-Mason & Jeffrey A. Miron, 1992. "Why Do Countries and Industries with Large Seasonal Cycles Also Have Large Business Cycles?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 621-656.
    8. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    9. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
    10. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 683-708.
    11. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
    12. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-1044, December.
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    14. Caballero, Ricardo J, 1992. "A Fallacy of Composition," American Economic Review, American Economic Association, vol. 82(5), pages 1279-1292, December.
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    Cited by:

    1. Mitsuhiro Kaneda & Gil Mehrez, 1998. "Seasonal Fluctuations and International Trade," International Trade 9809001, EconWPA.
    2. Bittmann, Thomas & Holzer, Patrick & Loy, Jens-Peter, 2016. "Seasonal Cost Pass-Through In The German Milk Market," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244779, German Association of Agricultural Economists (GEWISOLA).

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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