Deep Dynamics

Abstract

How do firms adjust their output, inventories, employment and capital in response to demandside shocks? To understand this, we estimate a reduced-form model using firm-level panel data and we construct a theoretical model that can match the estimated impulse-response functions. A combination of convex adjustment costs and implementation lags explains input adjustment very well. Although inputs adjust slowly, production responds quickly to the demand shock and this adjustment is explained by a combination of increasing returns and increased utilization of the production factors. To avoid stock-outs, firms increase their inventories when demand increases.

JEL Classification: E220, E230, E240, E320