Existing empirical evidence suggests that output is more variable than consumption so that production smoothing is not apparently present. In this paper, we investigate some macroeconomic implications of the proposition that the empirical evidence reflects the presence of some firms in the economy that produce with nonconvex technologies. Overall, when activities are sufficiently complementary and inventory holding is sufficiently costly, nonconvexities at the firm level can generate a pattern of output and sales such that the variance of output exceeds that of sales at an aggregate level. In this way, nonconvexities at the individual firm level may have macroeconomic consequences.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics