Fixed adjustment costs and aggregate fluctuations

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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 distribution of firm outcomes follows a simple and intuitive law of motion that links aggregate 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.




Elsby, M. W. L., & Michaels, R. (2019). Fixed adjustment costs and aggregate fluctuations. Journal of Monetary Economics, 101, 128–147.

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