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Ulric B. and Evelyn L. Bray Social Sciences Seminar

Tuesday, April 11, 2023
4:00pm to 5:00pm
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Baxter Lecture Hall
Comparative statics with adjustment costs and the le Chatelier principle
John Quah, Professor, Department of Economics, Johns Hopkins University,

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.

Written with Eddie Dekel and Ludvig Sinander.

For more information, please contact Barbara Estrada by phone at 626-395-4083 or by email at [email protected].