The role of intratemporal adjustment costs in a multisector economy

Abstract

A multi-sector business cycle model is constructed which is capable of reproducing the procyclica1 behavior of cross-industry measures of capital, employment, and output. It is shown that some variants of conventional business cycle models may not be capable of reproducing these facts. It is then shown how the introduction of intratemporal adjustment costs can be crucial to such a model. These costs imply that it is difficult or costly to alter the composition of the capital goods that are produced. The presence of these costs eliminates many counterfactual observations of the model that would otherwise be present. The dynamic response of variables in the model is different from what one would observe in the standard one-sector model. The effect of including intratemporal adjustment costs for labor as well is also analyzed. , We thank Finn Kydland for many useful discussions over the course of this project. We also received helpful comments from seminar participants at University College Dublin, Pennsylvania State University, the Federal Reserve Bank of Dallas and the 1995 meetings of the Western Economic Association. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Determinacy through intertemporal capital adjustment costs

“…Some recent related studies set them as follows. Benhabib and Farmer (1996) Since the parameter choices of Huffman and Wynne (1999) come from a serious calibration of a model that is very close to the one employed here, we will use their values. However, we will can be accounted for.…”

Relative-Preference Shifts and the Business Cycle

“…11 In the blue line version (reported in Figure 1) s 1 = 0:1 so c 1 c 2 < 1, and then C s 1 < 0. If C # then U C ".…”

“…Burns-Mitchell (1946) included inter-sectoral comovement in the de…nition of business cycles, and many empirical studies prove pro-cyclical behavior of cross-sector measures of employment, output, and investment (see Christiano andFitzgerald, 1998 andHu¤man andWynne, 1999). Since it is di¢ cult to identify reasonable aggregate disturbances capable of explaining historical business cycles, a vast literature investigates the transmission mechanisms from sectoral shocks to aggregate ‡uctuations.…”

Convergence, capital accumulation and the nominal exchange rate

“…It is also essential to introduce the relative price channel described in the introduction. Huffman and Wynne (1999) develop a multisector real model with investment frictions (sector-specific investment goods and costs of adjusting the product mix in the investment sector). Their objective is, however, to match the closed economy comovements of real activity across sectors (consumption and investment).…”