THE LINEAR-QUADRATIC ADJUSTMENT COST MODEL AND THE DEMAND FOR LABOR

In this paper we demonstrate a new way of testing the linear quadratic adjustment cost (LQAC) model under rational expectations. We illustra te how the parameter restrictions arising from this model can be forma lly specified and we use these restrictions to extent the technique of Campbell and Shiller (1987) to a wider class of models based on prese nt value relations. Potentially the demand for labour is an area in wh ich the LQAC model can find applicability in practice and subsequently we analyse sectoral labour demand in Danish manufacturing. We find, h owever, that for our data set the quadratic adjustment cost model unde r rational expectations can be rejected.