Fixed Adjustment Costs and Aggregate Fluctuations

Fixed Adjustment Costs and Aggregate Fluctuations

By Mike Elsby and Ryan Michaels

Published in the Journal of Monetary Economics in 2019


This paper studies the analytics of a canonical model of lumpy microeconomic adjustment. We provide a novel characterization of the implied aggregate dynamics. In general, the dis- tribution of firm outcomes follows a simple and intuitive law of motion that links aggre- gate outcomes to rates of adjustment. Analytical approximations reveal, however, that the aggregate dynamics are approximately invariant to a relevant range of adjustment costs. This neutrality is an aggregation result that emerges from a symmetry property in the distributional dynamics, independent of market equilibrium considerations. Quantitative illustrations confirm these results for parameterizations used in the employment and price adjustment literatures.

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