Paris Saclay Seminar
Comparative statics with adjustment costs and the le Chatelier principle
John Quah (Johns Hopkins University & National University of Singapore)
Abstract:
We develop a theory of monotone comparative statics for models with adjustment costs. We show that comparative-statics conclusions may be drawn under the usual ordinal complementarity assumptions on the objective function, assuming very little about costs: only a mild monotonicity condition is required. We use this insight to prove a general le Chatelier principle: under the ordinal complementarity assumptions, if short-run adjustment is subject to a monotone cost, then the long-run response to a shock is greater than the short-run response. We extend these results to a fully dynamic model of adjustment over time: the le Chatelier principle remains valid, and under slightly stronger assumptions, optimal adjustment follows a monotone path. We apply our results to models of capital investment and of sticky prices.
Joint work with Eddie Dekel and Ludvig Sinander.
Location:
CEPS, ENS Paris-Saclay, 4 avenue des Sciences, 91190, Gif-sur-Yvette