Factor Adjustment Costs: A Structural Investigation

37 Pages Posted: 28 Oct 2012

See all articles by Haroon Mumtaz

Haroon Mumtaz

University of London - School of Sciences

Francesco Zanetti

Bank of England

Date Written: October 26, 2012

Abstract

This paper assesses various capital and labour adjustment costs functions estimating a general equilibrium framework with Bayesian methods using US aggregate data. The estimation reveals that the adjustment costs are convex in both capital and labour and allowing for their joint interaction is important. The structural model enables us to identify the response of factor adjustment costs to exogenous disturbances, and to establish that shocks to technology and the job separation rate are key drivers of adjustment costs. However, the analysis shows that factor adjustment costs are unable to explain large fluctuations in the firm’s market value in the data.

Suggested Citation

Mumtaz, Haroon and Zanetti, Francesco, Factor Adjustment Costs: A Structural Investigation (October 26, 2012). Bank of England Working Paper No. 467. Available at SSRN: https://ssrn.com/abstract=2167334 or http://dx.doi.org/10.2139/ssrn.2167334

Haroon Mumtaz

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Francesco Zanetti (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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