[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/egc/wpaper/883.html
   My bibliography  Save this paper

Three Strikes and You.re Out: Reply to Cooper and Willis

Author

Listed:
  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel

    (Dept. of Economics, Yale University)

Abstract
Cooper and Willis (2003) is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy. Their case is based on "reproducing" our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs. That is, they supposedly find our results where they should not be found. The three claims on which they base their case are incorrect. Their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied. They also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment. This is incorrect as well, since the 'gap approach' has been derived formally from at least as sophisticated microeconomic models as the one they present. On a more positive note, the correct interpretation of Cooper and Willis's results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations.

Suggested Citation

  • Ricardo J. Caballero & Eduardo M.R.A. Engel, 2004. "Three Strikes and You.re Out: Reply to Cooper and Willis," Working Papers 883, Economic Growth Center, Yale University.
    • Handle: RePEc:egc:wpaper:883
    as

    Download full text from publisher

    File URL: http://www.econ.yale.edu/growth_pdf/cdp883.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 359-383.
    2. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January.
    3. Khan, Aubhik & Thomas, Julia K., 2003. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 331-360, March.
    4. J. Michael Harrison & Thomas M. Sellke & Allison J. Taylor, 1983. "Impulse Control of Brownian Motion," Mathematics of Operations Research, INFORMS, vol. 8(3), pages 454-466, August.
    5. Marcelo L. Veracierto, 2002. "Plant-Level Irreversible Investment and Equilibrium Business Cycles," American Economic Review, American Economic Association, vol. 92(1), pages 181-197, March.
    6. Russell W. Cooper & Jonathan L. Willis, 2001. "The economics of labor adjustment : mind the gap," Research Working Paper RWP 01-06, Federal Reserve Bank of Kansas City.
    7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    8. Dixit, Avinash, 1991. "A simplified treatment of the theory of optimal regulation of Brownian motion," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 657-673, October.
    9. Julio J. Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116, National Bureau of Economic Research, Inc.
    10. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 47(2), pages 119-129, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. von Kalckreuth, Ulf, 2008. "Financing constraints, firm level adjustment of capital and aggregate implications," Discussion Paper Series 1: Economic Studies 2008,11, Deutsche Bundesbank.
    2. Christian Bayer, 2004. "A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper," Macroeconomics 0408010, University Library of Munich, Germany.
    3. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2010. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 378-391, May.
    4. Ulf Kalckreuth, 2011. "Panel estimation of state-dependent adjustment when the target is unobserved," Empirical Economics, Springer, vol. 40(1), pages 205-235, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2004. "A Comment on the Economics of Labor Adjustment: Mind the Gap: Reply," American Economic Review, American Economic Association, vol. 94(4), pages 1238-1244, September.
    2. repec:hum:wpaper:sfb649dp2008-022 is not listed on IDEAS
    3. Andrew Caplin & John Leahy, 2010. "Economic Theory and the World of Practice: A Celebration of the ( S , s ) Model," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 183-202, Winter.
    4. Sveen, Tommy & Weinke, Lutz, 2007. "Lumpy investment, sticky prices, and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 23-36, September.
    5. Rene Garcia & Marco Bonomo, 2004. "Optimal Rules under Adjustment Cost and Infrequent Information," Econometric Society 2004 Latin American Meetings 135, Econometric Society.
    6. Le, Duc Thuc & Jones, John Bailey, 2005. "Optimal investment with lumpy costs," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1211-1236, July.
    7. Yao, Fang, 2008. "Lumpy labor adjustment as a propagation mechanism of business cycles," SFB 649 Discussion Papers 2008-022, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    8. Bayer, Christian, 2008. "On the interaction of financial frictions and fixed capital adjustment costs: Evidence from a panel of German firms," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3538-3559, November.
    9. repec:hum:wpaper:sfb649dp2008-056 is not listed on IDEAS
    10. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    11. Distante, Roberta & Petrella, Ivan & Santoro, Emiliano, 2013. "Asymmetry Reversals and the Business Cycle," Economy and Society 151531, Fondazione Eni Enrico Mattei (FEEM).
    12. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2010. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 378-391, May.
    13. Fabio Verona, 2014. "Investment Dynamics with Information Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1627-1656, December.
    14. Isaac Baley & Andrés Blanco, 2021. "Aggregate Dynamics in Lumpy Economies," Econometrica, Econometric Society, vol. 89(3), pages 1235-1264, May.
    15. Fahr, Stephan & Yao, Fang, 2009. "When does lumpy factor adjustment matter for aggregate dynamics?," Working Paper Series 1016, European Central Bank.
    16. repec:zbw:bofrdp:2013_018 is not listed on IDEAS
    17. Bloom, Nick, 2006. "The impact of uncertainty shocks: firm level estimation and a 9/11 simulation," LSE Research Online Documents on Economics 19867, London School of Economics and Political Science, LSE Library.
    18. Caballero, Ricardo J. & Engel, Eduardo M. R. A., 1993. "Microeconomic rigidities and aggregate price dynamics," European Economic Review, Elsevier, vol. 37(4), pages 697-711, May.
    19. R?diger Bachmann & Ricardo J. Caballero & Eduardo M. R. A. Engel, 2013. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 29-67, October.
    20. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 359-383.
    21. Ruediger Bachmann & Eduardo Engel & Ricardo Caballero, 2006. "Lumpy Investment in Dynamic General Equilibrium," 2006 Meeting Papers 775, Society for Economic Dynamics.
    22. Gautier, Erwan & Le Bihan, Hervé, 2011. "Time-varying (S, s) band models: Properties and interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 394-412, March.
    23. Jaime Casassus & Pierre Collin-Dufresne & Bryan R. Routledge, 2005. "Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology," NBER Working Papers 11864, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Adjustment hazard; aggregate nonlinearities; lumpy adjustment; observed and unobserved gaps; quadratic adjustment;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:egc:wpaper:883. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benjamin King (email available below). General contact details of provider: https://edirc.repec.org/data/egyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.