The role of intratemporal adjustment costs in a multisector economy

In this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross-sector measures of capital, employment and output. We start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts. We then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model. These costs make it difficult to alter the composition of production of new capital goods. The presence of these costs eliminates many counterfactual observations of the model that would otherwise be present. The dynamic response of variables in the model is different from what one would observe in the standard one-sector model. We also examine the implications of imposing intratemporal adjustment costs for labor. The model can also account for the cross-sector behavior of employment observed in the data. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E22; E24; E32.