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A Note On Variable Capital Utilization In Growth And Business Cycle Theory

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  • Strulik, Holger
  • Trimborn, Timo

Abstract

It was always considered to be a major achievement of modern business cycle economics that it was solidly grounded in neoclassical growth theory. Preserving this joint foundation, however, imposes a discipline on the specification of models with variable capital utilization. In this note we show that conventional specifications of the depreciation cost of capital utilization and the labor supply elasticity, introduced into business cycle theory to generate a satisfactory amplification of shocks, entail counterfactual growth dynamics: the positive association between capital stock and GDP along the growth path turns negative. Across economies with access to the same technology, the economy with the lowest capital stock per capita is predicted to produce the highest output per capita. We compute lower and upper bounds for the involved elasticities between which these counterfactual dynamics are avoided.

Suggested Citation

  • Strulik, Holger & Trimborn, Timo, 2015. "A Note On Variable Capital Utilization In Growth And Business Cycle Theory," Macroeconomic Dynamics, Cambridge University Press, vol. 19(7), pages 1622-1632, October.
  • Handle: RePEc:cup:macdyn:v:19:y:2015:i:07:p:1622-1632_00
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    Cited by:

    1. Strulik, Holger & Trimborn, Timo, 2011. "The Dark Side of Fiscal Stimulus," Hannover Economic Papers (HEP) dp-466, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    2. repec:got:cegedp:150 is not listed on IDEAS
    3. Strulik, Holger & Trimborn, Timo, 2014. "Natural disasters and macroeconomic performance: The role of residential investment," Center for European, Governance and Economic Development Research Discussion Papers 194 [rev.], University of Goettingen, Department of Economics.
    4. Holger Strulik & Timo Trimborn, 2019. "Natural Disasters and Macroeconomic Performance," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(4), pages 1069-1098, April.
    5. repec:bla:germec:v:18:y:2017:i:2:p:154-181 is not listed on IDEAS

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