Microeconomic Adjustment Research Articles

Microeconomic Adjustment Hazards and Aggregate Dynamics

The basic premise of this paper is that understanding aggregate dynamics requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive. We provide a general characterization of lumpy behavior at the microeconomic level in terms of an adjustment-hazard function, which relates the probability that a unit adjusts to the deviation of its state variable from its moving target. We characterize rich, cross-sectionally dependent aggregate dynamics generated by nonconstant hazards. We present an example based on U. S. manufacturing employment and job flows, and find that increasinghazard models outperform constant-hazard-partial-adjustment models in describing aggregate employment dynamics.

Kinked Adjustment Costs and Aggregate Dynamics

Because adjustment costs may make infrequent corrections preferable to partial continuous adjustment, microeconomic units often behave quite differently from representative agents in aggregate dynamic models. Idiosyncratic uncertainty precludes perfect coordination of microeconomic adjustment and explains the much smoother behavior of aggregate variables. This paper reviews and extends models of optimal adjustment under uncertainty and of dynamic aggregation, and argues that unsynchronized microeconomic adjustment can provide a sensible, structural interpretation of macroeconomic time series. A simple statistical representation of the process followed by aggregate variables in the presence of microeconomic adjustment costs and of idiosyncratic uncertainty is shown to satisfactorily explain the behavior of U.S. durable consumption data.

Kinked Adjustment Costs and Aggregate Dynamics

Because adjustment costs may make infrequent corrections preferable to partial continuous adjustment, microeconomic units often behave quite differently from representative agents in aggregate dynamic models. Idiosyncratic uncertainty precludes perfect coordination of microeconomic adjustment and explains the much smoother behavior of aggregate variables. This paper reviews and extends models of optimal adjustment under uncertainty and of dynamic aggregation, and argues that unsynchronized microeconomic adjustment can provide a sensible, structural interpretation of macroeconomic time series. A simple statistical representation of the process followed by aggregate variables in the presence of microeconomic adjustment costs and of idiosyncratic uncertainty is shown to satisfactorily explain the behavior of U.S. durable consumption data.

PETROLEUM RESERVOIR MANAGEMENT: A RESERVOIR ECONOMIC APPROACH

This paper outlines an approach to investigate optimal depletion policies and economic policy issues for petroleum reservoirs.We integrate an economic understanding into the more detailed engineering studies and petroleum reservoir depletion technology. The paper quantifies the microeconomic adjustment of the exploitation of different types of petroleum reservoirs including the impact which economic parameters have on the resource recovery.

Budget Deficits, Inflation Accounting, and Macroeconomic Policy: A Skeptical Note

ABSTRACTThis paper challenges the mechanical application of inflation accounting to public sector deficits as it has been suggested in recent years. Although the theoretical considerations underlying the proposed adjustment for the inflation premium of interest payments are well taken, the new approach has fundamentally focused on measurement issues with little attention paid to the behavioral aspects of microeconomic adjustment. This paper, therefore, raises skepticism about the usefulness of inflation accounting, if such a correction is not accompanied by a conceptual model that links behavioral responses of individuals to balance sheets and other stock variables. In a departure from previous investigations, the paper also points out the possibility that inflation accounting might have more relevant implications for public, rather than private, spending.

Microeconomic adjustments in Argentina during 1976–1981: The importance of changing levels of financial subsidies

This paper uses the financial statements of Argentine industrial firms to study the micro level impact of recent liberalization and reform attempts. The main lesson is that extremely large subsidies were provided to the industrial sector by way of negative effective financial costs. These negative costs appeared first in the late 1970s because of real currency appreciation and unconstrained access to foreign credit, then again in 1981 because of an exchange insurance program. We also find that the Argentine Government's announced intention to promote exporting activities did not translate into relatively favorable product market conditions for exporting firms. To the contrary, the real currency appreciation squeezed exporters' profits while redundant tariff protection insulated import competing firms from world competition, at least until 1980.

Microeconomic adjustments in Uruguay during 1973–1981: The interplay of real and financial shocks

This paper uses the financial statements of industrial firms to develop an integrated firm's eye view of the changes in the Uruguayan economy during 1973–1981. In the first of three subperiods, 1973–1975, real financial costs were very negative and tended to offset low returns on operating assets. During 1976–1978, the dismantling of interest rate controls increased real financial costs, but other factors increased the returns on operating assets more rapidly. During 1979–1981, financial costs jumped enough to more than absorb increases in gross earnings, which were probably due to Argentine demand. The rates of earning and capital formation were highest among exporters in the second subperiod, when a major export promotion program was in place. This pattern was reversed in the third subperiod, as the promotion programs were dismantled and real currency appreciation seemed to squeeze gross earnings of exportables relatively more. This unequal squeezing was probably due to redundant tariff and other protection for import-competing producers.

Microeconomic adjustments in Chile during 1977–1981: The importance of being a grupo

This paper uses the financial statements of industrial firms to provide an integrated firm level view of the changes in the Chilean economy during 1977–1981. Both real side and financial shocks had major effects on the performance of some types of firms. Exportable goods producers did relatively poorly in ‘real’ activities, for reasons probably tied to Chile's real prolonged exchange rate appreciation. Import-competing firms that began the period with high protection did even worse, apparently reflecting the larger change in their output prices as protection was dismantled. The reforms thus shifted demand away from industries least in line with the country's comparative advantage, but they also hurt exportables — the very sector authorities intended to promote. On the financial side, the highly positive real cost of peso borrowing reduced industrial profits considerably. A handful of powerful conglomerates ( grupos) generated large (but presumably unrealized) capital gains by investing in the securities of related enterprises. Such activities allowed them to offset relatively poor returns on real operations; and their ownership of the country's major banks allowed them to consolidate control of a large volume of assets with debt finance. These two results explain why the grupos were suddenly in considerable financial difficulty when the Chilean boom ended in 1982.

Part II: Microeconomic adjustments during the reforms introduction

The macroeconomic interpretations of the Southern Cone Reforms in Part I stressed several stylized outcomes: (1) a growing and persistent shift in relative prices against tradables in all three countries following the implementation of the rabfira; (2) a progressive rise in the real cost of borrowing in all three countries; (3) large capital inflows when controls on capital flows were lifted; (4) persistent spreads between peso and dollar interest rates in Argentina and Uruguay in spite of high capital mobility. Changes of this magnitude in the economic environment must have created major new incentives for resource reallocation within firms (e.g., to retire or contract new debt or to shift from peso to dollar debt) as well as across firms. The task for Part II of this Symposium is to investigate how the microeconomic adjustment to the new set of incentives took place and whether the intent of the reforms to shift resources from nontradable to tradable goods producers and within tradable producers from import substitutes towards exporters did in fact take place. Issues not covered in the stylized outcomes described in Part I that are addressed in the following set of papers include the following: Did reductions in the rate of devaluation have their main effect through squeezing price-cost margins, reducing sales volumes, or changing the real cost of credit? Did freeing domestic interest rates markedly cut net earnings rates, or did firms avoid higher financial costs by shifting their liabilities to dollars? Which effects did firms feel first: those of greater competition in the product markets or those of freeing interest rates? And, of these two effects, which one most affected the rates of return on net worth? Each paper in this Symposium addresses such basic micro empirical questions as these to shed light on the issues of what went wrong in the Southern Cone. and why. The method is, I believe, new in development economics. Each of the three studies uses the financial statements of firms to track the experiences in different sectors through each reform episode. Rather than simply relying on industrial classifications to group firms, interviews with local industrialists and other auxiliary data were used to determine the exposure to international competition for each firm studied. With this information, subsamples of firms were constructed to conform to the familiar distinctions between exportable goods producers, importcompeting producers, and nontradable goods producers. Similar procedures were followed to accomplish other breakdowns, such as between independent and group-affiliated firms in Chile or between firms with high and low tariff protection in both Chile and Uruguay. Each paper compares the experiences of firms across sectors and time, focusing on three issues: First, what were the net earnings rate trajectories of each type of firm? Second, how did demand conditions, interest rates, exchange rates, wages, and regulatory regimes combine to influence these trajectories? And third, what were the associated changes in the financial structures and investment policies of firms? To address each issue, financial indicators were constructed from the raw data, which the reader may view as having consisted of firm and period-specific observations on the accounts presented in Tables l(a) and l(b). The various indicators constructed and their interpretations are now reviewed.