Abstract
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.
Keywords
- 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
This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume
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Khan, A., Thomas, J.K. (2008). Adjustment Costs. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_422-2
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DOI: https://doi.org/10.1057/978-1-349-95121-5_422-2
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Latest
Adjustment Costs- Published:
- 24 April 2017
DOI: https://doi.org/10.1057/978-1-349-95121-5_422-2
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Adjustment Costs- Published:
- 22 November 2016
DOI: https://doi.org/10.1057/978-1-349-95121-5_422-1