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Firm Heterogeneity, Capacity Utilization and the Business Cycle

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Author Info

  • 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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Bibliographic Info

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. Craig Burnside & Martin Eichenbaum, 1994. "Factor Hoarding and the Propagation of Business Cycles Shocks," NBER Working Papers 4675, National Bureau of Economic Research, Inc.
  2. Andreas Hornstein & Edward C. Prescott, 1989. "The firm and the plant in general equilibrium theory," Staff Report 126, Federal Reserve Bank of Minneapolis.
  3. Cooley, Thomas F & Hansen, Gary D & Prescott, Edward C, 1995. "Equilibrium Business Cycles with Idle Resources and Variable Capacity Utilization," Economic Theory, Springer, vol. 6(1), pages 35-49, June.
  4. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1993. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  5. Robert E. Hall, 1988. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  7. Fagnart, Jean-Francois & Licandro, Omar & Sneessens, Henri, . "Capacity utilization dynamics and market power," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3906, Universidad Carlos III de Madrid.
  8. Mark Bils & Jang-Ok Cho, 1993. "Cyclical factor utilization," Discussion Paper / Institute for Empirical Macroeconomics 79, Federal Reserve Bank of Minneapolis.
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Citations

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Cited by:
  1. Radim Bohacek & Hugo Rodriguez Mendizabal, 2004. "Credit markets and the propagation of monetary policy shocks," CERGE-EI Working Papers wp244, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Sarah Marit Lein & Eva Köberl, 2009. "Capacity Utilisation, Constraintes and Price Adjustments under the Microscope," Working Papers 2009-06, Swiss National Bank.
  3. Pedro Pablo Alvarez Lois, 2000. "Endogenous capacity utilization and the asymmetric effects of monetary policy," UFAE and IAE Working Papers 469.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Pierre Lafourcade, 2003. "Asset prices and rents in a GE model with imperfect competition," Finance and Economics Discussion Series 2003-60, Board of Governors of the Federal Reserve System (U.S.).
  5. Martial Dupaigne, 2000. "Capital Utilization and the Willingness to Rest: A General Equilibrium Analysis," Econometric Society World Congress 2000 Contributed Papers 0391, Econometric Society.
  6. Alvarez-Lois, Pedro P., 2004. "Capacity constraints, idiosyncratic demand uncertainty and the dynamics of inflation," Economics Letters, Elsevier, vol. 83(1), pages 15-21, April.
  7. Masanao Aoki, 2003. "A Simple Quantity Adjustment Model of Economic Fluctuations and Growth," UCLA Economics Online Papers 232, UCLA Department of Economics.
  8. Paul Frijters & Dirk Bezemer & Uwe Dulleck, 2005. "Contacts, Social Capital and Market Institutions - A Theory of Development," Paul Frijters Discussion Papers 2005-1, School of Economics and Finance, Queensland University of Technology.
  9. Pedro Pablo Álvarez Lois, 2003. "Capacity utilization and Monetary Policy," Banco de España Working Papers 0306, Banco de España.
  10. Alvarez-Lois, Pedro P., 2006. "Endogenous capacity utilization and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2213-2237, November.
  11. Pedro P. Alvarez-Lois, 2005. "Production Inflexibilities and the Cost Channel of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 170-193, January.
  12. 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, vol. 8(4), pages 850-865, October.

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