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Vintage Capital and Expectations Driven Business Cycles

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  • Flodén, Martin

Abstract

This paper demonstrates that increased optimism about future productivity can generate an immediate economic expansion in a neoclassical model with vintage capital and variable capacity utilization. Previous research has documented that standard neoclassical models cannot generate a simultaneous increase in consumption, investment, and hours in response to news shocks, and that optimism in these models tends to reduce investment and hours. When technology is vintage specific, however, expectations of higher future productivity raise the demand for new vintages of capital relative to installed capital. Capital depreciates faster when utilization is high, but this depreciation only affects installed capital. The cost of high depreciation therefore falls when the value of installed capital falls. It is demonstrated here that with standard parameter values, more optimism raises utilization, consumption, investment, hours, and output.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6113.

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Date of creation: Feb 2007
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Handle: RePEc:cpr:ceprdp:6113

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Related research

Keywords: business cycles; capital-embodied technological change; expectations; news; vintage capital;

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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, . "Expectations-Driven Cycles in the Housing Market," Discussion Papers 12/08, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  3. Sandra Gomes & Nikolay Iskrev & Caterina Mendicino, 2013. "Monetary policy shocks: We got news!," Working Papers w201307, Banco de Portugal, Economics and Research Department.
  4. Stefano Eusepi & Bruce Preston, 2011. "Expectations, Learning, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 101(6), pages 2844-72, October.

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