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Learning by investing--embodied technology and business cycles

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Author Info
Geng Li

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Abstract

In the last decade of the 20th century, the U.S. economy witnessed a persistent and substantial increase in private investment. The boom was sharply reversed in 2001, and a great deal of evidence suggests that the capital stock had become excessive. Standard equilibrium business cycle models have difficulties in predicting the investment boom and overshooting. An embodied technology model is constructed to replicate the pattern of investment boom and collapse. Unlike previous models of embodiment, the present model assumes that new technology increases the productivity of capital of all vintages, but only new capital can facilitate the adoption of the new technology. Further, although agents in this model know about the advent of a new technology, they have imperfect information about its magnitude. Agents learn the magnitude by investing in new capital. I present a sufficient condition for having a persistent investment boom and overshooting. I also solve the model numerically in a dynamic general equilibrium (DGE) setup. The model presented in this paper extends the standard DGE business cycle models in two ways: First, it presents a strong internal propagation mechanism with respect to technology shocks; second, it generates endogenous recessions without invoking technological regress. The model also offers a possible explanation on why consumption growth was strong during the last recession.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-15.

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Date of creation: 2006
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Handle: RePEc:fip:fedgfe:2007-15

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Related research
Keywords: Business cycles ; Capital investments ; Econometric models;

References listed on IDEAS
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  1. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May. [Downloadable!] (restricted)
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  2. Hercowitz, Zvi, 1998. "The 'embodiment' controversy: A review essay," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 217-224, February. [Downloadable!] (restricted)
  3. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  4. Philippe Aghion, Patrick Bolton and Bruno Jullien., 1987. "Learning Through Price Experimentation by a Monopolist Facing Unknown Demand," Economics Working Papers 8748, University of California at Berkeley.
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  5. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December. [Downloadable!] (restricted)
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  6. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August. [Downloadable!] (restricted)
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  7. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Alessandro Barbarino & Boyan Jovanovic, 2004. "Shakeouts and Market Crashes," NBER Working Papers 10556, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Alessandro Barbarino & Boyan Jovanovic, 2007. "Shakeouts And Market Crashes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 385-420, 05. [Downloadable!] (restricted)
  9. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December. [Downloadable!] (restricted)
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  10. Susanto Basu & John Fernald & Miles Kimball, 2002. "Are Technology Improvements Contractionary?," Harvard Institute of Economic Research Working Papers 1986, Harvard - Institute of Economic Research. [Downloadable!]
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  11. John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September. [Downloadable!]
  12. Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
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  13. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
  14. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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  15. Peter L. Rousseau & Boyan Jovanovic, 2004. "General Purpose Technologies," 2004 Meeting Papers 103, Society for Economic Dynamics.
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  16. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September. [Downloadable!] (restricted)
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  17. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 621-54, July. [Downloadable!] (restricted)
  18. Rob, Rafael, 1991. "Learning and Capacity Expansion under Demand Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 655-75, July. [Downloadable!] (restricted)
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