Fixed Adjustment Costs and Aggregate Fluctuations
By Mike Elsby and Ryan Michaels
Published in the Journal of Monetary Economics in 2019
Abstract
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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