The New Palgrave Dictionary of Economics

Living Edition
| Editors: Matias Vernengo, Esteban Perez Caldentey, Barkley J. Rosser Jr

Adjustment Costs

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This article surveys the use of adjustment frictions in macroeconomic research, exploring the consequences of convex and non-convex adjustment costs for firm- level decisions and the dynamics of macroeconomic aggregates. The mechanics of these frictions are illustrated using several prominent examples including the partial adjustment model of employment, the q-theoretic investment model, and lumpy adjustment models of investment and employment. We also review the (S,s) inventory model, where stock accumulation is explained as the result of fixed delivery costs, and briefly discuss (S,s) decision rules arising from piecewise-linear costs in the context of capital irreversibility and firing taxes.


Adjustment costs Adjustment hazards Aggregate nonlinearities Business cycles Capital irreversibility Convex cost functions Distributed lags Dynamic stochastic equilibrium analysis Euler equations Equilibrium Frictions Intermediate goods Inventory policies Investment theory Linear quadratic inventory models Lumpy investment Market-clearing relative prices Monetary non-neutralities Neoclassical investment theory Nonlinear microeconomic adjustment Partial adjustment Piecewise-linear adjustment costs Production functions Quadratic cost functions Rational expectations (S,s) decision rule (S,s) policies Tobin’s q Total factor productivity 

JEL Classifications

D4 D10 
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Authors and Affiliations

  1. 1.