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Firm Heterogeneity, Capacity Utilization and the Business Cycle

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  • Jean-François Fagnart

    (THEMA and Universté de Cergy-Pontoise)

  • Omar Licandro

    (FEDEA)

  • Franck Portier

    (Université des Sciences Sociales de Toulouse)

Abstract

In a stochastic dynamic general equilibrium framework, we introduce the concept of capacity utilization (as opposed to capital utilization). We consider an economy where monopolistic firms use a putty-clay technology and decide on their productive capacity and technology under under uncertainty. An idiosyncratic uncertainty about the exact position of the demand curve faced by each firm explains why some productive capacities remain idle and why individual capacity utilization rates differ across firms. A variable capacity utilization allows for a good description of some of the main stylized facts of the business cycle, propagates and magnifies aggregate technological shocks and generates endogenous persistence (i.e., the output growth rate displays positive serial correlation). (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0057
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 2 (April)
Pages: 433-455

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Handle: RePEc:red:issued:v:2:y:1999:i:2:p:433-455

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References

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  1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 245-73, April.
  2. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(2), pages 319-354, April.
  3. Andreas Hornstein & Edward C. Prescott, 1989. "The firm and the plant in general equilibrium theory," Staff Report, Federal Reserve Bank of Minneapolis 126, Federal Reserve Bank of Minneapolis.
  4. Hall, Robert E, 1988. "The Relation between Price and Marginal Cost in U.S. Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 921-47, October.
  5. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1154-74, December.
  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 402-17, June.
  7. Cooley, Thomas F & Hansen, Gary D & Prescott, Edward C, 1995. "Equilibrium Business Cycles with Idle Resources and Variable Capacity Utilization," Economic Theory, Springer, Springer, vol. 6(1), pages 35-49, June.
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Citations

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Cited by:
  1. Martial Dupaigne, 2000. "Capital Utilization and the Willingness to Rest: A General Equilibrium Analysis," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0391, Econometric Society.
  2. Pedro Pablo Álvarez Lois, 2003. "Capacity utilization and Monetary Policy," Banco de Espa�a Working Papers, Banco de Espa�a 0306, Banco de Espa�a.
  3. Dirk Bezemer & Uwe Dulleck & Paul Frijters, 2003. "Contacts, Social Capital and Market Institutions - A Theory of Development," Vienna Economics Papers, University of Vienna, Department of Economics 0311, University of Vienna, Department of Economics.
  4. Sarah Marit Lein & Eva Köberl, 2009. "Capacity Utilisation, Constraintes and Price Adjustments under the Microscope," Working Papers 2009-06, Swiss National Bank.
  5. Radim Bohacek & Hugo Rodriguez Mendizabal, 2003. "Credit Markets and the Propagation of Monetary Policy Shocks," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 599.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Alvarez-Lois, Pedro P., 2004. "Capacity constraints, idiosyncratic demand uncertainty and the dynamics of inflation," Economics Letters, Elsevier, Elsevier, vol. 83(1), pages 15-21, April.
  7. Pedro Pablo Alvarez Lois, 2000. "Endogenous capacity utilization and the asymmetric effects of monetary policy," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 469.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Gary D. Hansen & Edward C. Prescott, 2005. "Capacity constraints, asymmetries, and the business cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 850-865, October.
  9. Martial Dupaigne, 2007. "Les variations choisies de l'utilisation du capital : une revue des implications macroéconomiques," Revue d'économie politique, Dalloz, Dalloz, vol. 0(2), pages 161-196.
  10. Pedro P. Alvarez-Lois, 2005. "Production Inflexibilities and the Cost Channel of Monetary Policy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 43(1), pages 170-193, January.
  11. Alvarez-Lois, Pedro P., 2006. "Endogenous capacity utilization and macroeconomic persistence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(8), pages 2213-2237, November.
  12. Pierre Lafourcade, 2003. "Asset prices and rents in a GE model with imperfect competition," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-60, Board of Governors of the Federal Reserve System (U.S.).
  13. Masanao Aoki, 2003. "A Simple Quantity Adjustment Model of Economic Fluctuations and Growth," UCLA Economics Online Papers, UCLA Department of Economics 232, UCLA Department of Economics.

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