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Adjustment Costs and Time-to-Build in Factor Demand in the US Manufacturing IndustryFranz C. PalmUniversity of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Marga PeetersDe Nederlandsche Bank Gerard A. PfannMaastricht University; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA) 1993 Empirical Economics, Vol. 18, 1993 Abstract: In order to explain cyclical behaviour of factor demand, the static neo-classical model of the firm has been extended to include either adjustment costs (e.g. Lucas (1967)) or time-to-build considerations as in Kydland and Prescott (1982). This paper presents an intertemporal factor demand model which accounts for adjustment costs and gestation lags. The closed form solution of the model is a highly restricted vector ARMA-process that is estimated using quarterly data for the manufacturing industry in the US 1960-1988. The main conclusion is that both sources of dynamics are identifyable and found to be empirically of importance.
Number of Pages in PDF File: 33 Keywords: time-to-build, adjustment costs, factor demand, gestation lags, investment JEL Classification: C32, C5, E22 Accepted Paper SeriesDate posted: June 11, 2011 ; Last revised: August 29, 2011Suggested CitationContact Information
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