time varying s s band models properties and interpretation a recent strand of empirical work uses s s models with time varying stochastic bands to describe infrequent adjustments of prices and other variables the present paper examines some properties of this model which encompasses most micro founded adjustment rules rationalizing infrequent changes we illustrate that this model is flexible enough to fit data characterized by infrequent adjustment and variable adjustment size we show that to the extent that there is variability in the size of adjustments e g if both small and large price changes are observed i a large band parameter is needed to fit the data and ii the average band of inaction underlying the model may differ strikingly from the typical observed size of adjustment the paper thus provides a rationalization for a recurrent empirical result very large estimated values for the parameters measuring the band of inaction

banking deregulation and industry structure evidence from the french banking reforms of 1985 we investigate how the deregulation of the french banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets following deregulation banks are less willing to bail out poorly performing firms and firms in the more bank dependent sectors are more likely to undertake restructuring activities at the industry level we observe an increase in asset and job reallocation an improvement in allocative efficiency across firms and a decline in concentration overall these findings support the view that a more efficient banking sector helps foster a schumpeterian process of creative destruction many economies around the world are characterized by heavily regulated bank

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

business cycles theory evidence and policy implications this paper looks at recent advances in the study of aggregate fluctuations the emphasis is on three prominent areas of research the stochastic growth model economies which exhibit macroeconomic complementarities and models that emphasize heterogeneity each section of the paper outlines the theory examines relevant empirical evidence and then discusses some policy implications of the analysis

the costs of hiring skilled workers the shape of adjustment costs in factor demand has been a matter of controversy for quiet some time while some researchers assume quadratic adjustment costs i e that it becomes increasingly expensive to recruit workers in a given time period others believe that there are economies of scale in recruitment surprisingly there is hardly any evidence so far on the shape of hiring costs based on microeconomic data in this paper we estimate the functional form of hiring costs in the theoretical framework of a generalized model of monopsony using both parametric and nonparametric estimation techniques we find strong evidence in favor of diseconomies of scale in recruiting skilled workers our results indicate that the labor market is monopsonistic

the 2009 recovery act stimulus at the extensive and intensive labor margins abstract this paper studies the effect of government stimulus spending on a novel aspect of the labor market the differential impact of spending on the total wage bill versus employment we analyze the 2009 recovery act via instrumental variables using a new instrument the spending done by federal agencies that were not instructed to target funds towards harder hit regions we find a moderate positive effect on jobs created saved i e the extensive margin and also a significant increase in wage payments to workers whose job status was safe without recovery act funds i e the intensive margin our point estimates imply that roughly one half of the wage payments resulting from the act were paid at the intensive margin to provide a theoretical underpinning for the estimates we build a micro founded dynamic model in which a firm meets new government demand with a combination of new hiring and increasing existing workers average hours faced with hiring costs and an overtime premium the firm responds by increasing hours along both margins our model analysis also provides insight into how government spending policy should be structured to lower the cost of generating new jobs finally we catalogue survey evidence from recovery act fund recipients that reinforces the importance of the intensive labor margin

closely competing firms and price adjustment some findings from an online marketplace we investigate retailers price setting behavior using a unique dataset containing by the second records of prices offered by closely competing retailers on a major japanese price comparison website first we find that when the average price of a product across retailers falls rapidly the frequency of price adjustments increases and the size of price adjustments becomes larger second we find positive autocorrelation in the frequency of price adjustments implying that there tends to be clustering where price adjustments occur in succession in contrast there is no such autocorrelation in the size of price adjustments these two findings indicate that the behavior of competing retailers is characterized by state dependent pricing rather than time dependent pricing

search frictions matching aggregate and establishment observations abstract we estimate a search model to match hours employment vacancies and unemployment at the micro and macrolevels we establish a set of facts concerning the variability of unemployment and vacancies in the aggregate and the distribution of net employment growth and the comovement of hours and employment growth at the establishment level a search model with non convex costs of posting vacancies establishment level profitability shocks and a contracting framework to set hours provides a structure to understand these observations the estimated model is able to capture both the aggregate and establishment level facts

adjustment costs inventories and output this paper analyzes the optimal adjustment strategy of an inventory holding firm facing price and quantity adjustment costs in an inflationary environment the model nests both the original menu cost model that allows production to be costlessly adjusted and the later model that includes price and quantity adjustment costs but rules out inventory holdings it is shown that the firm s optimal adjustment strategy may involve stockouts at low inflation rates output is inversely related to the inflation rate and the length of time demand is satisfied increases with the demand elasticity but decreases with the storage cost and the real interest rate

consumer durables and inertial behaviour estimation and aggregation of s s rules for automobile purchases the s s model originally introduced in the study of inventories see arrow et al 1951 scarf 1959 has recently received renewed attention both in the durable consumption and in the investment and labour demand literatures caballero 1993 for instance appeals to these type of models to explain the time series properties of durable expenditure and in particular the persistence or slow adjustment of such a variable in this paper i model the purchase behaviour of automobiles by u s households as an s s rule i estimate a flexible specification of such a rule using a large microeconomic data set and study some of the aggregate implications of this type of inertial behaviour the paper is one of the first attempts at estimating directly the parameters of an s s rule using micro data because of this some of the methodological issues concerning the specification and the estimation of s s rules are relevant for many potential applications furthermore the paper is one of the first to discuss and quantify the aggregate implications of an s s rule estimated on micro data in the presence of non convex transaction costs a full and consistent characterization of individual behaviour is very hard and typically requires strong restrictions grossman and laroque 1991 prove that an s s rule is optimal for a consumption and investment problem under very special circumstances some of their results were extended by eberly 1991 and beaulieu 1993a b eberly 1991 in particular has derived some closed form solutions for durable consumption in the presence of transaction costs while caballero and engel 1994 construct a model of investment where an s s rule is optimal the main problem with these theoretical results is that it is only possible to show optimality of s s rules under very stringent conditions in particular a necessary condition to derive them is that the optimization problem faced by an individual consumer can be reduced to a problem with a single state variable unfortunately as pointed out by bar ilan and blinder 1992 even simple generalizations are extremely difficult to analyse

partial adjustment without apology econometric partial adjustment models perform relatively well at the aggregate level however many kinds of microeconomic behavior involve discrete and occasional choices analyzing the classic employment adjustment problem we show how a generalized partial adjustment model tractably accommodates both observations by aggregating the actions of heterogeneous producers facing fixed adjustment costs aggregate disturbances cause changes in establishment level target employment and in the measure of establishments actively adjusting to their target whereas aggregate responses exhibit partial adjustment our framework also can be applied in general equilibrium settings with persistent idiosyncratic shocks without forfeiting the convenient use of linear solution methods

anticompetitive financial contracting the design of financial claims this paper presents the first model where entry deterrence takes place through financial rather than product market channels in standard models of the interaction between product and financial markets a firm s use of financial instruments deters entry by affecting product market behavior whereas in our model entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms we find that in order to deter entry the claims held on incumbent firms should be sufficiently risky i e equity in contrast to the standard branderlewis 1986 result that debt deters entry the model sheds light on the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms it also provides an explanation for why venture capitalists hold automatically convertible securities in start up firms

current real business cycle theories and aggregate labor market fluctuations hours worked and the return to working are weakly correlated traditionally the ability to account for this fact has been a litmus test for macroeconomic models existing real business cycle models fail this test dramatically we modify prototypical real business cycle models by allowing government consumption shocks to influence labor market dynamics this modification can in principle bring the models into closer conformity with the data our empirical results indicate that it does

microeconomic rigidities and aggregate price dynamics abstract this paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies the model we propose outperforms the constant probability of adjustment partial adjustment model in describing the path of postwar u s inflation using only aggregate data we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target level at the aggregate level we find that the aggregate price level responds less to negative shocks than to positive shocks that the size of this asymmetry increases with the size of the shock and that the number of firms changing their prices and therefore the flexibility of the price level to aggregate shocks varies endogenously over time in response to changes in economic conditions

labor adjustment costs in a destination country the case of mexico abstract rodrik rodrik d 1997 has globalization gone too far institute for international economics washington dc argues that firms use the threat of moving to low cost generally developing markets to make employment more flexible at home although a large literature documents significant adjustment costs in developed countries we know little about their size and importance in developing countries that receive capital we employ monthly mexican data from the gatt nafta period to estimate adjustment costs in mexico we consider adjustment costs for production and non production workers and allow for asymmetry while patterns of adjustment costs are similar as in developed countries adjustment costs in mexico are generally an order of magnitude smaller

nonconvex factor adjustments in equilibrium business cycle models do nonlinearities matter recent empirical analysis has found nonlinearities to be important in understanding aggregated investment using an equilibrium business cycle model we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs we find that while such costs lead to nontrivial nonlinearities in aggregate investment demand equilibrium investment is effectively unchanged our finding based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity is robust to the introduction of shocks to the relative price of investment goods

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

heterogeneity in consumer price stickiness we examine heterogeneity in price stickiness using a large original set of individual price data collected at the retail level for the computation of the french consumer price index for that purpose we estimate at a very high level of disaggregation a piecewise constant hazard model as well as competing risks duration models that distinguish between price increases price decreases and product replacements the main findings are the following a at the product outlet type level the baseline hazard function of a price spell is nondecreasing b cross product and cross outlet type heterogeneity is pervasive both in the shape and the level of the hazard function as well as in the impact of covariates c there is strong evidence of state dependence especially for price increases d there is an asymmetry because determinants of price increases differ from those of price decreases

uncertainty and the employment dynamics of small and large businesses we examine the impact of uncertainty on employment dynamics alternative measures of uncertainty are constructed based on the survey of professional forecasters and regression based forecasting models for gdp growth inflation sp the impact on large businesses are generally non existent or weaker our results suggest that to truly understand the effects of uncertainty on employment dynamics we need to focus on the relatively smaller and entrepreneurial businesses we discuss implications for the framing of economic policy

the cross sectional dynamics of the us business cycle 1950 1999 abstract modern interest in business cycles has focussed on the co movements and correlations in the major macroeconomic aggregates in this paper we offer another dimension to business cycle analysis which looks at the time series of cross sectional distributions of the growth rates of sales by us quoted companies from 1950 to 1999 we detect correlations between aggregate business cycle fluctuations and the higher moments of the cross sectional distribution we find a significant negative correlation between the rate of growth of gdp and the cross sectional variance and skewness of growth rates of sales on the other hand there is positive correlation at business cycle frequencies with kurtosis in order to explore this further we turn to the dynamic evolution of firms and analyse the sensitivity of growth rates to aggregate shocks conditioning on firm size the results suggest that despite considerable heterogeneity macroeconomic shocks have pervasive effects that are however more pronounced for firms in the middle range of growth this has implications for both macro and industrial economics

endogenous business cycle propagation and the persistence problem the role of labor market frictions contrasting sharply with a recent trend in dsge modeling we propose a business cycle model where frictions and shocks are chosen with parsimony the model emphasizes a few labor market frictions and shocks to monetary policy and technology the model estimated from u s quarterly postwar data accounts well for important differences in the serial correlation of the growth rates of aggregate quantities the size of aggregate fluctuations and key comovements including the correlation between hours and labor productivity despite its simplicity the model offers an answer to the persistence problem chari et al 2000 that does not rely on multiple frictions and adjustment lags or ad hoc backward looking components we conclude modern dsge models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles

a comment on the economics of labor adjustment mind the gap reply in earlier contributions ricardo j caballero and eduardo m r a engel 1993 hereafter ce and caballero et al 1997 hereafter ceh investigate labor dynamics using a methodology which postulates that employment changes depend on a gap between the actual and target levels of employment both studies find evidence of nonlinearities in aggregate timeseries data employment growth depends on the cross sectional distribution of employment gaps this finding is taken as evidence that nonlinear adjustment at the microeconomic level matters for aggregate time series this is important for business cycle and policy analysis as it implies macroeconomics must take the cross sectional distribution of employment gaps into account this paper questions the methodology and thus the conclusions of these studies we argue that these reported aggregate nonlinearities may be the consequence of mismeasurement of the gap rather than nonlinearities in plant level adjustment both ce and ceh rely upon a hypothesis that employment growth responds to a gap z between the desired and actual number of workers at a plant the advantage to the gap approach is that the choice of employment an inherently difficult dynamic optimization problem is characterized through a nonlinear relationship between and z that is the adjustment rate z is postulated to be a nonlinear function of z however there is no free lunch the desired number of workers and hence the employment gap is unobservable thus in order to confront data this approach needs an auxiliary theory to infer z from observed variables both ce and ceh use observed hours variations to infer the employment gap this inference is one element of our critique of the gap methodology to assess this methodology we simulate data from the solution of a dynamic model of labor adjustment assuming quadratic adjustment cooper department of economics university of texas austin tx 78712 e mail cooper eco utexas edu willis research department federal reserve bank of kansas city kansas city mo 64198 e mail jonathan willis kc frb org we are grateful to seminar participants at boston university emory university the university of british columbia the federal reserve bank of boston the university of haifa the university of iowa the university of michigan the university of pennsylvania the university of texas at austin the 2002 nber ef meeting and the 2000 cmsg conference at mcmaster university for comments and suggestions discussions with eduardo engel john haltiwanger daniel hamermesh peter klenow and christopher ragan were much appreciated the authors thank the nsf for financial support we also appreciate comments from the referees cooper thanks the federal reserve bank of minneapolis for its hospitality during revisions of this manuscript the views expressed herein are solely those of the authors and do not necessarily reflect the views of the federal reserve bank of kansas city the federal reserve bank of minneapolis or the federal reserve system 1 daniel hamermesh 1989 uses a gap methodology as well but does not adopt the approach of estimating a nonlinear hazard function explained below to infer the nature of adjustment costs hence we focus on ce and ceh in this discussion of methodology 2 we do not contest the general view of nonlinear employment adjustment at the plant level this finding is consistent with other evidence that points to inactivity as well as bursts of employment adjustment at the plant level for example hamermesh 1989 provides a revealing discussion of lumpy labor adjustment at a set of manufacturing plants steven davis and john haltiwanger 1992 document large employment changes at the plant level ceh also report evidence of inactivity in plant level employment adjustment there seems little doubt that an explanation of plant level employment dynamics requires a model of adjustment that is richer than the quadratic adjustment cost structure and includes some forms of nondifferentiability and or nonconvexity 3 as the gap approach is used in numerous other applications capital adjustment durable adjustment price adjustment to approximate the solution to dynamic optimization problems our concerns may be relevant for those exercises as well

investment dynamics with fixed capital adjustment cost and capital market imperfections this paper examines the implications of financing frictions on capital stocks and on capital accumulation in the presence of non convex costs of adjusting the capital stock in this setup finance has an influence on both the level of capital and the timing of investment finance and productivity are complements and finance influences investment the strongest when firms wish to significantly adjust capital for fundamental reasons these theoretical considerations are confronted with uk data while finance is mostly irrelevant for long term capital decision the short run investment function shows a significant impact of finance which is also strongest for strong fundamental investment incentives

inflation deflation expectations and economic stability in a kaleckian system abstract in this paper we analyze the impact of inflation deflation expectations and the effect of the monetary authority s inflation targeting policy in a kaleckian system on the basis of macro foundation approaches for this purpose we build a dynamical system composed of four variables the rate of utilization the wage share the nominal rate of interest and the expected rate of inflation and examine the properties especially stability of this dynamical system we then find that the existence of adaptive inflation deflation expectations always destabilizes our kaleckian system irrespective of the revision speed of expectations while that the monetary authority s intensive inflation targeting policy can make the system stable but the effect of this policy depends heavily upon the public credibility of it we also perform numerical simulations to check that our analysis is valid

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

investment and the taylor rule in a dynamic keynesian model abstract we study monetary policy in a reduced form dynamic model with bounded rationality and an empirically motivated investment function investment has important dynamic effects in our model in particular the cost of capital effect on investment is more important for monetary transmission than the more widely studied intertemporal substitution parameter in consumption furthermore a strong taylor rule response to unemployment in this model is more effective in stabilizing demand induced fluctuations than a strong response to inflation indeed an excessively aggressive response to inflation destabilizes the simulated output and inflation fluctuations

testing the nairu model for the united states this paper tests using u s data the dynamics implied by the nairu view of the relationship between inflation and the unemployment rate the results are somewhat sensitive to the measure of inflation used but they generally reject the dynamics an alternative way of thinking about the relationship between inflation and the unemployment rate is suggested

microdata evidence on the empirical importance of selection effects in menu cost models we use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost this self selec

the labour share and the dynamics of output abstractwe derive a new keynesian is curve that is augmented to capture the direct effects of the labour share on output our derivation shows that the direct effect of the labour share on output is ambiguous furthermore theory suggests that the expected labour share negatively affects output empirically we find that the labour share plays a significant role in driving output dynamics however contrary to theoretical expectation the expected labour share positively affects output in some cases a finding we call the labour share puzzle we also find that over time there seems to be a general shift in aggregate demand dynamics towards being profit led i e rising labour share decreases output we conclude that policymakers should not ignore the labour share in their decisions

estimating unemployment inflows outflows and long term unemployment in britain using the cointegration approach a model is estimated of flows into and out of unemployment using the johansen multivariate cointegration approach and uk data for the period 1974q4 to 1993q3 two long run equilibrium relationships are obtained covering the outflow rate and unemployment duration which include variables such as the replacement ratio structural change and output a unique feature of the model is that it allows the inflow rate to determine the outflow rate and vice versa this is argued to be important given the common european stylized fact that inflows and outflows are both countercyclical and strongly correlated thus if firms and workers are heterogeneous hiring and firing is contemporaneous necessitating the type of model estimated here some interesting results include the finding that output is not important in determining the outflow rate and that the speed of adjustment of the outflow rate to changes in its underlying equilibrium is slow in contrast the proportion of long term unemployed is positively re

economic theory and the world of practice a celebration of the s s model it was the question of how best to balance the costs of ordering and of running out of stock against the costs of holding excess inventory that inspired kenneth arrow theodore harris and jacob marschak to introduce the s s model in 1951 in this celebratory article we show how this model not only answered important practical questions but also opened the door to a quite startling range of important and challenging follow up questions many of great practical importance and analytic depth the s s model has become one of the touchstone models of economics opening new vistas of applied economic theory to all who internalize its structure today it is universally applied to solve questions faced in inventory control the core model elements uncertainty and fixed costs of adjustment are ubiquitous which has resulted in its becoming the general purpose economic model of discrete adjustment the s s model has also become a profound source of inspiration for macroeconomists seeking to understand the role that discrete microeconomic adjustments play in macroeconomic fluctuations looking forward we foresee rapid growth in the use of s s modeling to aid households making complex and costly financial decisions such as when and how to terminate a mortgage in the projected era of household operations research new modeling challenges will arise due to enriched feedback from the world of practice

three strikes and you re out reply to cooper and willis cooper and willis 2003 is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy their case is based on reproducing our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs that is they supposedly find our results where they should not be found the three claims on which they base their case are incorrect their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied they also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment this is incorrect as well since the gap approach has been derived formally from at least as sophisticated microeconomic models as the one they present on a more positive note the correct interpretation of cooper and willis s results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations

corporate profitability and the dynamics of competition in emerging markets a time series analysis the paper presents time series analyses of corporate profitability in seven leading developing countries dcs using the common methodology of the persistence of profitability pp studies and systematically compares the results with those for advanced countries acs surprisingly both short and long term persistence of profitability for dcs are found to be lower than those for acs the paper concentrates on economic explanations for these findings it also reports the results on the persistence of the two components of profitability output capital ratios and profit margins these too raise important general issues of economic interpretation for pp studies which are outlined

estimating a new keynesian phillips curve with a corrected measure of real marginal cost evidence in japan we estimate a new keynesian phillips curve nkpc in japan focusing on the measurement of real marginal cost rmc especially we correct labor share by taking account of two kinds of labor market frictions i labor adjustment costs and ii real wage rigidity our results show that the consideration of these labor market frictions greatly improves the fit of japan s nkpc furthermore if we additionally incorporate materials prices in the calculation of rmc then the fit of the nkpc is further improved our most important finding is that the conventional backward looking component is no more needed to explain japan s inflation dynamics if we use a corrected measure of rmc

capital adjustment patterns in swedish manufacturing firms what model do they suggest in this paper we study the capital adjustment process in swedish manufacturing firms and relate the empirical findings to standard models of firm behavior in the presence of impediments to capital adjustments we find that i a model with irreversible capital goes a very long way in capturing the salient features of firm level capital adjustment behavior to see this an integrated approach is necessary since different alternative models do well in certain comparative dimensions but not in others ii the partial adjustment model generally fails to explain capital adjustment patterns iii the capital accumulation process is a highly volatile and non persistent process on the firm level iv firms adjustment behavior is asymmetric in that they are more likely to tolerate excess capital than shortages of capital and finally v the estimated adjustment function implies that aggregate investment is relatively unresponsive to aggregate shocks in deep recessions as compared to the responsiveness in normal times

price stickiness in ss models new interpretations of old results abstract what is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks the answer to this question ranges from a one to one link calvo g 1983 prices in a utility maximizing framework journal of monetary economics 12 383 398 to no connection whatsoever caplin a spulber d 1987 menu costs and the neutrality of money quarterly journal of economics 102 703 726 the purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results in doing so we propose new interpretations of key results in this area which in turn suggest the kind of ss model that is likely to generate substantial price rigidity among these new interpretations we revisit caplin and spulber s monetary neutrality result we show that when price stickiness is measured in terms of the impulse response function this result is not a consequence of aggregation as is often assumed but is due instead to the absence of price stickiness at the microeconomic level we also show that the selection effect according to which units that adjust their prices are those that benefit the most is neither necessary nor sufficient to account for the higher aggregate flexibility of ss type models compared to calvo models instead the key concept is the contribution of the extensive margin of adjustment to the aggregate price response the aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive

consumption commitments and habit formation we analyze the implications of household level adjustment costs for the dynamics of aggregate consumption we show that an economy in which agents have consumption commitments is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth findings that are typically attributed to habit formation unlike habit formation and other theories but consistent with empirical evidence the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks these results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs we develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

social network structure and status competition in status competition studies the utility of heterogeneous individuals typically depends on an economy wide average indicator of status in our model emulative and jealous agents are embedded in an exogenous network where agent specific reference group is determined by the direct link emanating from the agent similarly to ghiglino and goyal 2010 but in a somewhat different framework we show that individual consumption is proportional to the agent s outbound katz bonacich network centrality measure and equilibrium is generally inefficient more important the negative externality associated with each agent depends on her inbound centrality measure the conspicuousness index a tax based on this index combined with a uniform lump sum transfer attains efficiency

coarse pricing policies the muted volatility of inflation during the great recession and its aftermath has refocused attention on the constraints that firms face when adjusting prices using new empirical and theoretical results i argue that each firm s choice of how much information to acquire to set prices plays a central role in determining the patterns of pricing at the product level and the degree of aggregate price rigidity in response to shocks in support of the information channel i present product level evidence that firms price goods using coarse pricing policies that are updated infrequently and consist of a small menu of prices firms are heterogeneous in the complexity and duration of their pricing policies and this heterogeneity is reflected in differential responses to the great recession cycle with firms exhibiting more complex policies responding more aggressively i develop a theory of information constrained price setting that generates coarse pricing endogenously and quantitatively matches the discreteness duration and volatility of policies in the data the information friction dampens the responsiveness of prices to shocks and coupled with heightened volatility induces firms to keep prices relatively high to protect against losses in an uncertain environment

plant level irreversible investment and equilibrium business cycles this paper evaluates the importance of microeconomic irreversibilities for aggregate dynamics using a real business cycle rbc model characterized by investment irreversibilities at the establishment level the main finding is that investment irreversibilities do not play a significant role in an otherwise standard realbusiness cycle model even though investment irreversibilities are crucial for establishment level dynamics aggregate fluctuations are basically the same under fully flexible or completely irreversible investment jel e22 e32

a comment on the economics of labor adjustment mind the gap rejoinder numerous papers in this literature have used these questions as motivation understanding the structure of labor adjustment costs is relevant any time a policy or forecasting question requires input on the properties of labor dynamics of course for some policy questions we are interested in the aggregate effects of policies hence understanding whether nonconvexities have implications for aggregate labor demand is crucial as well in terms of the ongoing discussion over these questions there seems to be agreement that the simple quadratic adjustment cost model is not an adequate representation of the costs plants face in adjusting the number of workers from data displayed by daniel hamermesh 1989 and caballero et al 1997 hereafter ceh one is certainly struck by both the inactivity of labor adjustment and the bursts of job creation and destruction at the plant level that said while these observations serve as evidence against a model which contains only quadratic adjustment costs they do not directly identify a particular structure of adjustment costs at the plant level inspection of the adjustment patterns reported in ceh though cast in terms of gaps does provide some evidence of partial adjustment and thus suggests the presence of both convex and nonconvex adjustment costs further caballero and engel 1993 hereafter ce and ceh appear to have provided useful evidence on the second question the nonlinearities they uncover in aggregated data suggest that nonconvexities at the plant level have aggregate implications

microeconomic adjustment hazards and aggregate dynamics the basic premise of this paper is that understanding aggregate dynamics requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive we provide a general characterization of lumpy behavior at the microeconomic level in terms of an adjustment hazard function which relates the probability that a unit adjusts to the deviation of its state variable from its moving target we characterize rich cross sectionally dependent aggregate dynamics generated by nonconstant hazards we present an example based on u s manufacturing employment and job flows and find that increasinghazard models outperform constant hazard partial adjustment models in describing aggregate employment dynamics

machine replacement and the business cycle lumps and bumps this paper explores investment fluctuations due to discrete changes in a plant s capital stock the resulting aggregate investment dynamics are surprisingly rich reflecting the interaction between a replacement cycle the cross sectional distribution of the age of the capital stock and an aggregate shock using plant level data lumpy investment is procyclical and more likely for older capital further the predicted path of aggregate investment that neglects vintage effects tracks actual aggregate investment reasonably well however ignoring fluctuations in the cross sectional distribution of investment vintages can yield predictable nontrivial errors in forecasting changes in aggregate investment

dominance and competition we propose and test two possible explanations of envy and its opposite gloating one explanation views them as a learning process just as regret and rejoice are in the private domain envy is the social correspondent of regret the other explanation traces envy back to the natural tendency of individuals to seek higher positions in the social ranking that is a dominant position a tendency with very strong evolutionary motives we show experimentally that these two functional reasons for envy coexist competition is the product of the desire for dominance rather than the artificial output of social arrangements jel d12 d87

labor demand and the structure of adjustment costs this study examines the costs firms face in adjusting labor demand to exogenous shocks evidence on monthly plant level data shows that adjustment proceeds in jumps employment is unchanged in response to small shocks but moves instantaneously to a new equilibrium if the shocks are large results in the large literature that assumes smooth adjustment are due to aggregation of this nonlinear relation the finding has implications for cyclical changes in productivity for severance pay layoff and plant closing restrictions and for all other policies that affect the cost of adjusting employment copyright 1989 by american economic association

what do residuals from first order conditions reveal about dge models the first order condition foc associated with labour in many dynamic general equilibrium models involves only current period variables residuals constructed from this foc are inconsistent with aggregate us data in that they are very large and highly persistent the persistence suggests that models which introduce dynamic terms in the labour foc may be more consistent with the data three such models one with learning by doing one with habit formation and one with labour adjustment costs confirm that they can reduce the persistence in the residuals making the models more consistent with the joint dynamics of consumption output and hours

aggregate employment dynamics building from microeconomic evidence this paper studies quarterly employment flows of approximately 10 000 u s manufacturing establishments the authors use establishments hours week to construct measures of the deviation between desired and actual employment and use these as the establishments main state variables the main findings are 1 microeconomic adjustment functions are nonlinear with plants adjusting disproportionately to large shortages 2 adjustments are often either large or nil suggesting the presence of nonconvexities in the adjustment cost technologies 3 the bulk of average employment fluctuations is accounted for by aggregate rather than reallocation shocks and 4 microeconomic nonlinearities amplify the impact of large aggregate shocks copyright 1997 by american economic association

effective labor regulation and microeconomic flexibility abstract microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative destruction the main reason why this process is not infinitely fast is the presence of adjustment costs some of them technological others institutional chief among the latter is labor market regulation while few economists object to the hypothesis that labor market regulation hinders the process of creative destruction its empirical support is limited in this paper we revisit this hypothesis using a new sectoral panel for 60 countries and a methodology suitable for such a panel we find that job security regulation clearly hampers the creative destruction process especially in countries where regulations are likely to be enforced moving from the 20th to the 80th percentile in job security in countries with strong rule of law cuts the annual speed of adjustment to shocks by a third while shaving off about 1 from annual productivity growth the same movement has negligible effects in countries with weak rule of law

a keynesian macroeconometric framework for the analysis of monetary policy rules abstract in the framework of a keynesian based monetary macro model we study the implications of targeting monetary aggregates or targeting the interest rate as two alternative monetary policy rules whereas the former targets the inflation rate indirectly through the control of the money supply the latter also called the taylor rule implies direct inflation targeting our monetary macro model exhibits asset market clearing disequilibrium in the product and labor markets sluggish price and quantity adjustments two phillips curves for the wage and price dynamics and expectations formation which represents a combination of adaptive and forward looking behavior the parameters of different model variants are estimated partly through single equation and partly through subsystem estimations for us quarterly time series data 1960 1 1995 1 with the estimated parameters system simulations for the two monetary policy rules are performed although the two rules have slightly different stability properties we show that discretionary monetary policy i e policy that responds to the state of macro variables has stabilizing effects we also show that our model with either of the two rules generate in terms of impulse response functions roughly the same responses to shocks as one obtains from standard var studies

balladurette and juppette a discrete analysis of scrapping subsidies this paper studies the effects of subsidies on durable goods markets in particular we focus on a recent policy in france in which the governments of balladur and juppe subsidized the replacement of old cars with new ones to study this policy we construct a dynamic stochastic discrete choice model of car ownership at the household level the resulting decision rules and equilibrium conditions are used to estimate the underlying parameters of the model using aggregate data these policy functions are used to evaluate the short and long run effects of the french policies we find that these policies do stimulate the automobile sector in the short run but through the induced changes in the cross sectional distribution of car ages create the basis for subsequent low activity further while these policies increase government revenues in the short run revenues in the long run are lower relative to a baseline without intervention

discrete adjustment to a changing environment experimental evidence abstract a laboratory experiment illustrates cognitive limitations in decision making that may be relevant for modeling price setting our subjects systematically depart from the optimal bayesian response in several respects their responses are random even conditioning on available information subjects adjust in discrete jumps rather than after each new piece of information and by both large and small amounts contrary to the predictions of an ss model of optimal adjustment subject to a fixed cost and they prefer to report round numbers even when that requires additional effort a model of inattentive adjustment is found to quantitatively outperform popular alternatives

aggregation and representative firm in the theory of investment abstract a simple investment function that is a second degree polynomial of a deviation from desired capital stock is capable of explaining a large part of aggregate investment i demonstrate this by calibration of firm investment based on this model

a comment on the economics of labor adjustment mind the gap evidence from a monte carlo experiment reply this comment addresses a point raised in russell cooper and jonathan willis 2003 2004 which discusses whether the gap approach is appropriate to describe the adjustment of production factors they show that this approach to labor adjustment as applied in ricardo j caballero eduardo engel and john c haltiwanger 1997 and caballero and engel 1993 can falsely generate evidence in favor of nonconvex adjustment costs even if costs are quadratic simulating a dynamic model of firm level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data they identify two factors producing this spurious evidence approximating dynamic adjustment targets by static ones and estimating the static targets themselves this comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs we show that the numerical approximation of the productivity process is pivotal for cooper and willis s finding with more precise approximations of the productivity process it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones jel e24 j3

asymmetries in price setting behavior new microeconometric evidence from switzerland in this paper we follow the recent empirical literature that has specified reduced form models for price setting that are closely tied to s s pricing rules our contribution to the literature is twofold first we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity second we use the estimator to examine the prevalence of positive price changes in a low inflation environment our model estimates suggest that if inflation falls from 0 9 to zero the share of positive price changes in all price changes falls from 63 6 to 56 2

on the interaction of financial frictions and fixed capital adjustment costs evidence from a panel of german firms abstract this paper analyzes the interaction of financial frictions and non convex adjustment costs non convex adjustment costs imply that firm level investment is lumpy firms invest infrequently but each investment is large this allows financial variables to influence investment along two margins they can alter the size of the stock of capital a company wishes to hold in the long run or they can influence the frequency at which investment projects are undertaken the empirical analysis of this paper reveals that finance has nearly no long run influence on the stock of capital in a sample of german companies by contrast the influence of finance on investment decisions is substantial consequently finance primarily affects investment frequencies and financial factors and fundamental capital productivity strongly interact in the determination of investment

the business cycle macroeconomic shocks and the cross section the growth of uk quoted companies we bring to light a significant aspect of firm level heterogeneity over the business cycle analysing the responsiveness of firm growth quoted uk companies to aggregate shocks we find that the effects of aggregate shocks are more pronounced for firms in the middle range of growth rapidly growing and rapidly declining firms are less sensitive to aggregate shocks than firms in the interior of the growth range this is consistent with the fact that the higher moments of the distribution of firm growth rates have significant cyclical patterns these findings throw new light on growth of firms as well as on business cycle dynamics

a re evaluation of adaptive expectations in light of global nonlinear dynamic analysis we undertake an analysis of the dynamic behaviour of a discrete time nonlinear monetary dynamics model with adaptive expectation that is a basic mechanism in a broad class of descriptive macrodynamic models we consider in particular a variety of ways in which the adaptive expectations mechanism may be formulated these differ in the degree of rationality of the economic agents that inhabit the model we study in detail the local and global properties of the maps determining the price dynamics