Adjustment Costs,Uncertainty, and the Level of Activity |
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Authors: | Louis Eeckhoudt Nicolas Treich |
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Abstract: | What is the effect of adjustment costs on economic activity? This is an important question that is still debated either at the political or the academic level. We consider a simple model where basically two effects come into play: Adjustment costs decrease current activity but may help maintain future activity. We examine their relative strength, first in a model with uncertain prices and then in a model with demand uncertainty (newsboy problem). |
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