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Investment, capacity, and output: a putty-clay approach

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  • Simon Gilchrist
  • John Williams

Abstract

In this paper, we embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. We show that the combination of log-normally distributed idiosyncratic productivity uncertainty and Leontief utilization choice yields an aggregate production function that is easily characterized in terms of hazard rates for the standard normal distribution. At low levels of idiosyncratic uncertainty, the short-run elasticity of supply is substantially lower than the elasticity of supply obtained from a fully-flexible Cobb-Douglas alternative. In the presence of irreversible factor proportions, an increase in idiosyncratic uncertainty typically reduces investment at the micro level but increases aggregate investment. Finally, we study the relationship between growth and uncertainty on aggregate capacity utilization and rates of machine replacement and investigate the factors that affect the magnitude of replacement echoes.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-44.

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Date of creation: 1998
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Handle: RePEc:fip:fedgfe:1998-44

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Related research

Keywords: Industrial capacity ; Macroeconomics ; Production (Economic theory);

References

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  1. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  2. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  3. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  4. Thomas F. Cooley & Jeremy Greenwood & Mehmet Yorukoglu, 1994. "The replacement problem," Discussion Paper / Institute for Empirical Macroeconomics 95, Federal Reserve Bank of Minneapolis.
  5. Calvo, Guillermo A, 1976. "Optimal Growth in a Putty-Clay Model," Econometrica, Econometric Society, vol. 44(5), pages 867-78, September.
  6. Russell Cooper & John Haltiwanger, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," NBER Working Papers 3552, National Bureau of Economic Research, Inc.
  7. Simon Gilchrist & John C. Williams, 1998. "Putty-Clay and Investment: A Business Cycle Analysis," NBER Working Papers 6812, National Bureau of Economic Research, Inc.
  8. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
  9. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
  10. Cass, David & Stiglitz, Joseph E, 1969. "The Implications of Alternative Saving and Expectations Hypotheses for Choices of Technique and Patterns of Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 586-627, Part II, .
  11. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  12. Andrew Atkeson & Patrick J. Kehoe, 1995. "Putty-clay capital and energy," Working Papers 548, Federal Reserve Bank of Minneapolis.
  13. Ando, Albert K, et al, 1974. "On the Role of Expectations of Price and Technological Change in an Investment Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 384-414, June.
  14. Edmond S. Phelps, 1962. "Substitution, Fixed Proportions, Growth and Distribution," Cowles Foundation Discussion Papers 133, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Susanto Basu & John Fernald, 2001. "Why Is Productivity Procyclical? Why Do We Care?," NBER Chapters, in: New Developments in Productivity Analysis, pages 225-302 National Bureau of Economic Research, Inc.

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