Adjustment Costs and Time-to-Build in Factor Demand in the US Manufacturing Industry

33 Pages Posted: 11 Jun 2011 Last revised: 29 Aug 2011

See all articles by Franz C. Palm

Franz C. Palm

University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Marga Peeters

De Nederlandsche Bank

Gerard A. Pfann

Maastricht University; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Date Written: 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.

Keywords: time-to-build, adjustment costs, factor demand, gestation lags, investment

JEL Classification: C32, C5, E22

Suggested Citation

Palm, Franz C. and Peeters, Marga and Pfann, Gerard Antonie, Adjustment Costs and Time-to-Build in Factor Demand in the US Manufacturing Industry (1993). Empirical Economics, Vol. 18, 1993, Available at SSRN: https://ssrn.com/abstract=1861264

Franz C. Palm

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-(0)43-3883833 (Phone)
+31-(0)43-3258535 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Marga Peeters (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Gerard Antonie Pfann

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-43-388 3832 (Phone)
+31-43-388 4856 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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