Fixed Adjustment Costs and Aggregate Fluctuations

Fixed Adjustment Costs and Aggregate Fluctuations

By Mike Elsby and Ryan Michaels


This paper studies the analytics of a canonical model of fixed adjustment costs in the presence of idiosyncratic productivity shocks. We provide a novel analytical characterization of the steady state and dynamics of aggregate outcomes implied by the model. The dynamics are shown to have an intuitive partial-adjustment representation. These results are then used to derive a set of approximations to model outcomes in the presence of a small adjustment cost. Surprisingly, these reveal that both aggregate steady-state outcomes and aggregate dynamics are approximately neutral with respect to a small fixed adjustment cost. We show that this neutrality result emerges from a symmetry property in the distributional dynamics of the model, and arises even in the absence of general equilibrium adjustment of prices. A set of quantitative illustrations confirms these analytical results for parameterizations commonly used in the literature on employment adjustment.

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