Modeling microeconomic transaction costs is essential for a better understanding of the behavior of most macroeconomic variables over time like consumer durables, business investment, inventories, employment, and prices. In order to obtain a genuinely structural interpretation of the time series properties of these variables, a careful treatment both of the underlying microeconomic problem and of the aggregation process is necessary. Available microeconomic models of dynamic adjustment in the presence of realistic transaction costs predict that individual units should not react to every innovation in their environment, and that they may react discontinuously to those innovations that trigger adjustment of variables determined by the model. The purpose of this research is to extend available models of infrequent microeconomic adjustment, to analyze their implications for aggregate phenomena, and to test these implications and assess their quantitative relevance. This research is important because it will provide a better understanding of the degree to which transaction costs at the micro level might provide a plausible microeconomic foundation for explaining the business cycle.
