Vintage Capital and Expectations Driven Business Cycles
AbstractThis 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6113.
Date of creation: Feb 2007
Date of revision:
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Other versions of this item:
- Martin Floden, 2007. "Vintage Capital and Expectations Driven Business Cycles," 2007 Meeting Papers 329, Society for Economic Dynamics.
- Floden, Martin, 2006. "Vintage Capital and Expectations Driven Business Cycles," Working Paper Series in Economics and Finance 643, Stockholm School of Economics.
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-24 (All new papers)
- NEP-BEC-2007-02-24 (Business Economics)
- NEP-DGE-2007-02-24 (Dynamic General Equilibrium)
- NEP-MAC-2007-02-24 (Macroeconomics)
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