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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. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-82, June.
  2. John V. Leahy & Toni M. Whited, 1995. "The Effect of Uncertainty on Investment: Some Stylized Facts," NBER Working Papers 4986, National Bureau of Economic Research, Inc.
  3. 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.
  4. Thomas F. Cooley & Jeremy Greenwood & Mehmet Yorukoglu, 1994. "The Replacement Problem," Working Papers 9408, Centro de Investigacion Economica, ITAM.
  5. Simon Gilchrist & John C. Williams, 1998. "Putty-clay and investment: a business cycle analysis," Finance and Economics Discussion Series 1998-30, Board of Governors of the Federal Reserve System (U.S.).
  6. Andrew Atkeson & Patrick J. Kehoe, 1995. "Putty-clay capital and energy," Working Papers 548, Federal Reserve Bank of Minneapolis.
  7. Boucekkine, R. & Germain, M. & Licandro, O., . "Replacement echoes in the vintage capital growth model," CORE Discussion Papers RP -1275, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. 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, .
  9. Pindyck, Robert S., 1986. "Irreversible investment, capacity choice, and the value of the firm," Working papers 1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  11. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  12. Edmond S. Phelps, 1962. "Substitution, Fixed Proportions, Growth and Distribution," Cowles Foundation Discussion Papers 133, Cowles Foundation for Research in Economics, Yale University.
  13. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  14. Calvo, Guillermo A, 1976. "Optimal Growth in a Putty-Clay Model," Econometrica, Econometric Society, vol. 44(5), pages 867-78, September.
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Cited by:
  1. John G. Fernald & Susanto Basu, 1999. "Why is productivity procyclical? Why do we care?," International Finance Discussion Papers 638, Board of Governors of the Federal Reserve System (U.S.).

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