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Adjustment Costs

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Abstract

Across a wide body of macroeconomic research, the interest in adjustment costs has been largely utilitarian. In designing theoretical models to organize our understanding of patterns observed in the data, we make hard choices about which of the many elements affecting the decisions of actual firms and households and the outcomes of their market interactions to include. Given their necessary simplicity, we often find that the predictions of the theoretical economies we are able to analyse are too stark relative to the behaviour observed in actual economies. Thus, in a variety of settings we have adopted adjustment costs in our economic laboratories to summarize omitted frictional elements that reduce, delay or protract changes in the demand and supply of final goods and their factor inputs in response to changes in economic conditions.

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© 2008 Palgrave Macmillan, a division of Macmillan Publishers Limited

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Khan, A., Thomas, J.K. (2008). Adjustment Costs. In: Durlauf, S.N., Blume, L.E. (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-58802-2_10

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