Partial adjustment

By:

James Knight

James is a lead editor for Invezz, where he covers topics from across the financial world, from the stock… read more.

Updated: Aug 20, 2021

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A process of adjustment where decision-makers aim to remove in any one period only part of any discrepancy between the actual level and their target level of the variables they control. Partial adjustment is adopted for two reasons: costs of adjustment and uncertainty. If costs of adjustment rise more than proportionally with the speed of adjustment, it is cheaper to spread any required adjustment out over several periods. Some adjustment costs do take this form: for example, a gradual fall in the labour force can be achieved through natural wastage while a rapid fall requires redundancies, which are cosdy and unpopular; and a gradual rise in the labour force poses fewer problems of recruitment and training than a sudden large increase. The other motive for partial adjustment is uncertainty. The target for any variable has to be based on available information. Gradual adjustment allows time to gather further information to check whether an apparent change in circumstances is permanent or only temporary.

Reference: Oxford Press Dictonary of Economics, 5th edt.