Delayed Adjustment and Persistence in Macroeconomic Models

Abstract

Our research explores a lingering economic puzzle: why are fluctuations in economic activity more persistent than standard models predict? We create a model that is capable of explaining aspects of this slow aggregate adjustment, and in particular slow investment adjustment and the so-called jobless recoveries. The crucial component of our model is the existence of intertemporal non-separabilities in production; one possible example of these non-separabilities is the accumulation of infrequent activities that are crucial to the firm in the long run but do not immediately benefit production in the short run - factors such as implementing new processes, worker training and staff meetings. We refer to these activities as organizational capital. When faced with higher demand or productivity, firms can temporarily expand production without investing in more capital or hiring more workers, by using this additional margin of adjustment. Eventually, further depleting the stock of organizational capital becomes costly, and investment and hiring increase slowly. 

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Presenter

Associate Professor Thijs van Rens, University of Warwick