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Vintage Capital and Expectations Driven Business Cycles

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  • Floden, Martin

    ()
    (Dept. of Economics, Stockholm School of Economics)

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 old 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 Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 643.

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Length: 22 pages
Date of creation: 10 Nov 2006
Date of revision:
Handle: RePEc:hhs:hastef:0643

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Related research

Keywords: Expectations; News; Business cycles; Vintage capital; Capital-embodied technological change;

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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2010. "Expectations-Driven Cycles in the Housing Market," Working Papers 201001, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Oct 2010.
  2. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning and Business Cycle Fluctuations," NBER Working Papers 14181, National Bureau of Economic Research, Inc.
  3. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  4. Sandra Gomes & Nikolay Iskrev & Caterina Mendicino, 2013. "Monetary policy shocks: We got news!," Working Papers w201307, Banco de Portugal, Economics and Research Department.

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