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Nonconvex Margins of Output Adjustment and Aggregate Fluctuations

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  • Sustek, Roman
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    Abstract

    In most manufacturing industries output is adjusted in a lumpy way along three margins: shiftwork, weekend work, and closing a plant temporarily down. We incorporate such decisions into a dynamic general equilibrium model and study: (i) if such micro-level nonconvexities magnify business cycles; and (ii) if the aggregate effects of changes in firms' borrowing costs due to monetary policy shocks vary over the cycle. Calibrated to industrial observations, the model implies that aggregate output is in fact 25% less volatile than in an economy without such features, and monetary policy shocks have similar effects on output in recessions as in expansions.

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    File URL: http://mpra.ub.uni-muenchen.de/17486/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17486.

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    Date of creation: 01 Sep 2009
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    Handle: RePEc:pra:mprapa:17486

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    Keywords: Nonconvexities; business cycles; capacity utilization; monetary policy; asymmetries;

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    1. Marvin J. Barth III & Valerie A. Ramey, 2002. "The Cost Channel of Monetary Transmission," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256 National Bureau of Economic Research, Inc.
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    13. Kydland, Finn E. & Prescott, Edward C., 1988. "The workweek of capital and its cyclical implications," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 343-360.
    14. George J. Hall, 1996. "Non-convex costs and capital utilization: a study of production and inventories at automobile assembly plants," Working Paper Series, Macroeconomic Issues WP-96-25, Federal Reserve Bank of Chicago.
    15. Ming Chien Lo & Jeremy Piger, 2003. "Is the response of output to monetary policy asymmetric? evidence from a regime-switching coefficients model," Working Papers 2001-022, Federal Reserve Bank of St. Louis.
    16. Joe Mattey & Steven Strongin, 1997. "Factor utilization and margins for adjusting output: evidence from manufacturing plants," Economic Review, Federal Reserve Bank of San Francisco, pages 3-17.
    17. Hansen, Gary D. & Sargent, Thomas J., 1988. "Straight time and overtime in equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 281-308.
    18. Carol Corrado & Joe Mattey, 1997. "Capacity Utilization," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 151-167, Winter.
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