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Nonconvex Margins of Output Adjustment and Aggregate Fluctuations

Sustek, Roman (2009): Nonconvex Margins of Output Adjustment and Aggregate Fluctuations.

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Abstract

In most manufacturing industries output is adjusted in a lumpy way along three margins: shiftwork, weekend work, and closing a plant temporarily down. We incorporate such decisions into a dynamic general equilibrium model and study: (i) if such micro-level nonconvexities magnify business cycles; and (ii) if the aggregate effects of changes in firms' borrowing costs due to monetary policy shocks vary over the cycle. Calibrated to industrial observations, the model implies that aggregate output is in fact 25% less volatile than in an economy without such features, and monetary policy shocks have similar effects on output in recessions as in expansions.

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