Factor adjustment costs: a structural investigation

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 26 October 2012

Working Paper No. 467
By Haroon Mumtaz and Francesco Zanetti 

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.

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