Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2018:10: DEEP DYNAMICS

Nils Gottfries (), Glenn Mickelsson () and Karolina Stadin ()
Additional contact information
Nils Gottfries: Department of Economics, Uppsala University, UCLS, IZA and CESifo
Glenn Mickelsson: Department of Economics
Karolina Stadin: Ratio Institute, Stockholm, and UCLS, Uppsala University

Abstract: Combining micro and macro data, we construct demand-side shocks, which we take to be exogenous for individual firms. We estimate a reduced-form model to describe how firms adjust their production, employment, capital stock, and inventories in response to such shocks. Then, we chose the structural parameters of a theoretical model so that the theoretical model can match the impulse-response functions from the estimated reduced-form model. Firms’ reactions to demand-side shocks are well explained by a model where firms have modest market power, face convex adjustment costs and where they can vary utilization flexibly. The stock-out motive helps to explain inventory dynamics.

Keywords: capacity utilization; production factor; labor hoarding; labor productivity; inventory holdings; returns to scale; production function; Solow residual

JEL-codes: E22; E23; E24; E32

73 pages, June 7, 2018

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