We thank Randall Wright and two anonymous referees for their comments. Any remaining errors are our own. The views expressed in this article are those of the authors and do not reflect those of the Federal Reserve Bank of Richmond or Minneapolis, or the Federal Reserve System. Please address correspondence to: Julia K. Thomas, Department of Economics, University of Minnesota, 1035 Heller Hall, 271 19th Avenue South, Minneapolis, MN 55455. Phone: 612 626 9675. E-mail: jkt@econ.umn.edu.
1468-2354/asset/IERE_centre.gif?v=1&s=0c315c019499e503c6ee8beebeaf22509be89282)
PARTIAL ADJUSTMENT WITHOUT APOLOGY†
Article first published online: 27 JUL 2006
DOI: 10.1111/j.1468-2354.2006.00396.x
Additional Information
How to Cite
King, . R. G. and Thomas, J. K. (2006), PARTIAL ADJUSTMENT WITHOUT APOLOGY. International Economic Review, 47: 779–809. doi: 10.1111/j.1468-2354.2006.00396.x
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Manuscript received June 2004; revised February 2005.
Publication History
- Issue published online: 27 JUL 2006
- Article first published online: 27 JUL 2006
- Abstract
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Econometric partial adjustment models perform relatively well at the aggregate level; however, many kinds of microeconomic behavior involve discrete and occasional choices. Analyzing the classic employment adjustment problem, we show how a generalized partial adjustment model tractably accommodates both observations by aggregating the actions of heterogeneous producers facing fixed adjustment costs. Aggregate disturbances cause changes in establishment-level target employment and in the measure of establishments actively adjusting to their target, whereas aggregate responses exhibit partial adjustment. Our framework also can be applied in general equilibrium settings with persistent idiosyncratic shocks without forfeiting the convenient use of linear solution methods.