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Capacity constraints, asymmetries, and the business cycle

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  • Gary D. Hansen

    (University of California, Los Angeles)

  • Edward C. Prescott

    (Arizona State University)

Abstract

We study how an occasionally binding capacity constraint affects the properties of business cycles. A real business cycle model is constructed where production takes place at individual plants and the number of plants operated varies over the cycle. The capacity constraint binds in states where all plants are operated. We derive the aggregate production function for this economy, which turns out to differ from the standard Cobb.Douglas function while retaining its desirable properties. The business cycle features of this one-sector growth model are similar to those of a standard real business cycle model in most respects. Our model does, however, display some properties of actual economies that standard models do not. In particular, business cycles in our model are asymmetric--troughs are deeper on average than peaks are tall. Also, labor's share of income is counter-cyclical, as it is in US data. (Copyright: Elsevier)

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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): 8 (2005)
Issue (Month): 4 (October)
Pages: 850-865

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Handle: RePEc:red:issued:v:8:y:2005:i:4:p:850-865

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Related research

Keywords: Capacity utilization; Asymmetric business cycles; Real business cycles;

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References

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  1. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  2. 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.
  3. Sichel, D.E., 1988. "Business Cycle Asymmetry: A Deeper Look," Papers, Princeton, Department of Economics - Financial Research Center 85, Princeton, Department of Economics - Financial Research Center.
  4. 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.
  5. Simon Gilchrist & John C. Williams, 1998. "Putty-clay and investment: a business cycle analysis," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-30, Board of Governors of the Federal Reserve System (U.S.).
  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  7. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  8. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  9. 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.
  10. Gomme, P. & Greenwood, J., 1993. "On the Cyclical Allocation of Risk," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 355, University of Rochester - Center for Economic Research (RCER).
  11. repec:cup:macdyn:v:3:y:1999:i:4:p:506-33 is not listed on IDEAS
  12. Jean-Fran├žois Fagnart & Omar Licandro & Franck Portier, 1999. "Firm Heterogeneity, Capacity Utilization and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 433-455, April.
  13. Finn E. Kydland & Edward C. Prescott, 1989. "Hours and employment variation in business cycle theory," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 17, Federal Reserve Bank of Minneapolis.
  14. Thomas F. Cooley & Gary D. Hansen & Edward C. Prescott, 1994. "Equilibrium business cycles with idle resources and variable capacity utilization," Working Papers 94-22, Federal Reserve Bank of Philadelphia.
  15. Altug, Sumru & Ashley, Richard A. & Patterson, Douglas M., 1999. "Are Technology Shocks Nonlinear?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 3(04), pages 506-533, December.
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