This paper studies quarterly employment flows of approximately 10,000 U.S. manufacturing establishments. We use establishments' hours-week to construct measures of the deviation between desired and actual employment and use these as the establishments' main state variables. Our main findings are: (i) micro-economic adjustment functions are nonlinear, with plants adjusting disproportionately to large shortages; (ii) adjustments are often either large or nil, suggesting the presence of nonconvexities in the adjustment cost technologies; (iii) the bulk of average employment fluctuations is accounted for by aggregate, rather than reallocation, shocks; and (iv) microeconomic nonlinearities amplify the impact of large aggregate shocks.

In this paper we derive a model of aggregate investment that builds from the lumpy microeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of the standard sharp (S,s) bands, firms' adjustment policies take the form of a probability of adjustment (adjustment hazard) that responds smoothly to changes in firms' capacity gap. The model has appealing aggregation properties, and yields nonlinear aggregate time series processes. The passivity of normal times is, occasionally, more than offset by the brisk response to large accumulated shocks. Using within and out-of-sample criteria, we find that the model performs substantially better than the standard linear models of investment for postwar sectoral U.S. manufacturing equipment and structures investment data.

When firms face menu costs, the relation between their output and money is highly non-linear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behaviour of a menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment costs they face. In this context we (i) generalize the Caplin and Spulber (1987) steady-state monetary-neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential impact of monetary shocks is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average.

In this paper we provide a framework to study the aggregate dynamic behavior of an economy where individual units follow (S, s) policies. We characterize structural and stochastic heterogeneities that ensure convergence of the economy's aggregate to that of its frictionless counterpart, determine the speed at which convergence takes place, and describe the transitional dynamics of this economy. In particular, we consider a dynamic economy where agents differ in their initial positions within their bands and face both stochastic and structural heterogeneity; where the former refers to the presence of (unit specific) idiosyncratic shocks, and the latter to differences in the widths of units' (S, s) bands and their response to aggregate shocks. We study the evolution of the economy's aggregate and the evolution of the difference between this aggregate and that of an economy without macroeconomic friction, where the latter pertains to a situation where individual units adjust with no delay to all shocks. We also examine the sensitivity of this difference to common shocks. For example, in the retail inventory problem the aggregate deviation and sensitivity to common shocks correspond to the aggregate inventory level and its sensitivity to aggregate demand shocks, respectively.

A Comment on the Economics of Labor Adjustment: Mind the Gap: Reply by Ricardo J. Caballero and Eduardo M.R.A. Engel. Published in volume 94, issue 4, pages 1238-1244 of American Economic Review, September 2004

Tax compliance studies usually focus on the effect of enforce-ment spending on tax evasion. Reliable estimates are difficult to obtain because evasion data are often suspect. This note shows how tax revenues can be used instead of evasion data to estimate the impact of changes in enforcement spending. Applying our method to Chilean data, we find that $1 (USD) of additional enforcement spending increases VAT revenues by $31. Moreover, current levels of spending could increase by 40% and still be within sample values. Hence, a 10% increase in spending could reduce evasion from its current rate of 23% to 20%.

In this paper we show that fixed‐term contracts, which are commonly used to franchise highways, do not allocate demand risk optimally. We characterize the optimal risk‐sharing contract and show that it can be implemented with a fairly straightforward mechanism—a least‐present‐value‐of‐revenue auction. Instead of bidding on tolls (or franchise lengths), as in the case of fixed‐term franchises, in an LPVR auction the bidding variable is the present value of toll revenues. The lowest bid wins and the franchise ends when that amount has been collected. We also show that the welfare gains that can be attained by replacing fixed‐term auctions with LPVR auctions are substantial.