Delayed Adjustment and Persistence in Macroeconomic Models
Estimated impulse responses of investment and hiring, unlike their model equivalents, typically peak well after the impact of a shock. We argue that such hump-shaped responses arise naturally in an otherwise standard model with adjustment costs in capital and labor when we relax the assumption that the production technology is separable over time. This result holds for both non-convex and convex cost functions, and for reasonable parameter values the effect is strong enough to match the persistence observed in the data. We discuss some evidence for our explanation and explore ways to test it against alternatives.
February 2020 [download pdf]