When Does Lumpy Factor Adjustment Matter for Aggregate Dynamics

31 Pages Posted: 6 Mar 2009

See all articles by Stephan Fahr

Stephan Fahr

European Central Bank

Fang Yao

Friedrich-Alexander University of Erlangen-Nürnberg

Date Written: March 3, 2009

Abstract

We analyze the dynamic effects of lumpy factor adjustments at the firm level onto the aggregate economy. We find that distinguishing between capital and labour as lumpy factors within the production function result in very different dynamics for aggregate output, investment and labour in an otherwise standard real business cycle model. Lumpy capital leaves the RBC dynamics mainly unchanged, while lumpy labour allows for persistence and an inner propagation within the model in form of hump-shaped impulse responses. In addition, when modeling lumpy adjustments on both investment and labour, the aggregate effects are even stronger. We investigate the mechanisms underlying these results and identify the elasticity of factor supply as the most important element in accounting for these differences.

Keywords: Lumpy labor adjustment, Lumpy investment, Business cycles, Elasticity of supply

JEL Classification: E32, E22, E24

Suggested Citation

Fahr, Stephan Alexander and Yao, Fang, When Does Lumpy Factor Adjustment Matter for Aggregate Dynamics (March 3, 2009). ECB Working Paper No. 1016. Available at SSRN: https://ssrn.com/abstract=1334130

Stephan Alexander Fahr (Contact Author)

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Fang Yao

Friedrich-Alexander University of Erlangen-Nürnberg ( email )

Schloßplatz 4
Bavaria 91054
Germany

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