Functional equivalence between intertemporal and multisectoral investment adjustment costs
✍ Scribed by Jinill Kim
- Publisher
- Elsevier Science
- Year
- 2003
- Tongue
- English
- Weight
- 151 KB
- Volume
- 27
- Category
- Article
- ISSN
- 0165-1889
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✦ Synopsis
Two types of adjustment cost speciÿcations coexist in macroeconomic models with investment: intertemporal adjustment costs which involve a nonlinear substitution between capital and investment in capital accumulation, and multisectoral costs which are captured by a nonlinear transformation between consumption and investment. This paper demonstrates a functional equivalence between these two speciÿcations. One surprising result is that an increase in multisectoral adjustment costs can be equivalent to a decrease in intertemporal adjustment costs, depending upon the size of the intertemporal costs. We then observe that the functional equivalence implies a problem in identifying the two types of adjustment costs and show ways to solve the problem.