How Important Is Discrete Adjustment in Aggregate Fluctuations?

Andrew Caplin and John Leahy

in Growth and Productivity in East Asia

Published by University of Chicago Press

Published in print August 2004 | ISBN: 9780226386805
Published online February 2013 | e-ISBN: 9780226387079 | DOI:
How Important Is Discrete Adjustment in Aggregate Fluctuations?

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The chapters in this volume tend to fall into two camps: those that take a microeconomic perspective on growth and productivity and those that take a more aggregate perspective. In spite of the discreteness of many microeconomic decisions, the standard approach to modeling in macroeconomics is to ignore all of this discrete behavior and assume that all firms are represented by a single representative firm that makes all of the investment decisions or that all consumers are represented by a single representative consumer that makes all of the consumption decisions. This chapter compares the aggregate dynamics of a discrete adjustment model to that of a representative agent model with continuous adjustment. It assumes that the durable goods holdings of different agents depreciate at different rates and compares the representative agent model with the Caplin-Leahy approximation to the discrete choice model. Finally, the chapter calibrates the Caplin-Leahy model using data from the U.S. automobile industry.

Keywords: macroeconomics; aggregate dynamics; discrete adjustment; continuous adjustment; durable goods; representative agent model; discrete choice model; Caplin-Leahy model; automobile industry

Chapter.  8960 words. 

Subjects: Business and Management

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