This paper examines the Pfann and Verspagen specification for asymmetric adjustment cost. We show that under asymmetry, the coefficient for the linearquadratic term understates the symmetric part of adjustment cost. The analysis reveals that a positive value for this parameter is sufficient but not necessary for a well-behaved adjustment cost function. The specification satisfies all the requirements when the linearquadratic coefficient equals zero. We also derive a condition for a well-behaved adjustment cost function within a feasible region when the parameter has negative sign. Since our study expands the range of permissible parameter values, it increases the empirical applicability of the asymmetric adjustment cost function.
ASJC Scopus subject areas
- Economics and Econometrics