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Endogenous capital utilization in a neoclassical growth model

  • Beatriz Rumbos
  • Leonardo Auernheimer
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    This paper introduces a variable rate of capital utilization and depreciation into a modified Ramsey-type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate. Copyright International Atlantic Economic Society 2001

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    Article provided by Springer & International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 29 (2001)
    Issue (Month): 2 (June)
    Pages: 121-134

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    Handle: RePEc:kap:atlecj:v:29:y:2001:i:2:p:121-134
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    1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Working Papers 5125, National Bureau of Economic Research, Inc.
    2. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 115-136.
    3. David N. DeJong & Beth F. Ingram & Yi Wen & Charles H. Whiteman, 1996. "Cyclical Implications of the Variable Utilization of Physical and Human Capital," Macroeconomics 9609004, EconWPA.
    4. David N. DeJong & Beth F. Ingram & Charles H. Whiteman, 1995. "Keynes vs. Prescott and Solow: Identifying Sources of Business Cycle Fluctuations," Macroeconomics 9504002, EconWPA, revised 18 Apr 1995.
    5. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-16, February.
    6. repec:adr:anecst:y:2000:i:58:p:05 is not listed on IDEAS
    7. Auernheimer, Leonardo & Saving, Thomas R, 1977. "Market Organization and the Durability of Durable Goods," Econometrica, Econometric Society, vol. 45(1), pages 219-28, January.
    8. Johnson, Paul A., 1994. "Capital utilization and investment when capital depreciates in use: some implications and tests," Journal of Macroeconomics, Elsevier, vol. 16(2), pages 243-259.
    9. repec:adr:anecst:y:2000:i:58:p:06 is not listed on IDEAS
    10. Steve Ambler & Alain Paquet, 1992. "Stochastic Depreciation and the Business Cycle Puzzle," Cahiers de recherche CREFE / CREFE Working Papers 8, CREFE, Université du Québec à Montréal.
    11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
    12. Calvo, Guillermo A, 1975. "Efficient and Optimal Utilization of Capital Services," American Economic Review, American Economic Association, vol. 65(1), pages 181-86, March.
    13. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
    14. Leonardo Auernheimer, 1986. "Variable Depreciation and Some of Its Implications," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 99-113, February.
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