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Idiosyncratic uncertainty, capacity utilization and the business cycle

  • Frank Portier
  • Omar Licandro
  • Jean Francois Fagnart

In a stochastic dynamic general equilibrium framework, we introduce the concept of variable capacity utilization (as opposed to the concept of capital utilization). We consider an economy where imperfectly competitive firms use a putty-clay technology and decide on their productive capacity level under uncertainty. An idiosyncratic uncertainty about the exact position of the demand curve faced by each firm explains why some productive capacities may remain idle in the sequel and why individual capacity utilization rates differ across firms. The capacity under-utilization at the aggregate level thus hides a diversity of microeconomic situations. The variablity of the capacity utilization allows for a good description of some of the main stylized facts of the busines cycle, propagates and magnifies aggregate technological shocks and generates endogenous persistence (i.e., the output growth rate displays positive serial correlation).

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Paper provided by FEDEA in its series Working Papers with number 96-11.

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Handle: RePEc:fda:fdaddt:9611
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  1. Sneessens, Henri R., 1987. "Investment and the inflation-unemployment tradeoff in a macroeconomic rationing model with monopolistic competition," European Economic Review, Elsevier, vol. 31(3), pages 781-808, April.
  2. Magill, M. & Quinzii, M., 1988. "Real Effects Of Money In General Equilibrium," Papers 8826, Southern California - Department of Economics.
  3. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, vol. 86(5), pages 1154-74, December.
  4. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
  5. repec:adr:anecst:y:1995:i:37-38:p:12 is not listed on IDEAS
  6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  7. repec:adr:anecst:y:1995:i:37-38 is not listed on IDEAS
  8. Puch, Luis A. & Licandro, Omar, 1995. "Capital utilization: maintenance costs and the business cycle," UC3M Working papers. Economics 3917, Universidad Carlos III de Madrid. Departamento de Economía.
  9. Bresnahan, Timothy F & Ramey, Valerie A, 1993. "Segment Shifts and Capacity Utilization in the U.S. Automobile Industry," American Economic Review, American Economic Association, vol. 83(2), pages 213-18, May.
  10. Sneessens, Henri & Licandro, Omar & Fagnart, Jean-Francois, 1995. "Capacity utilization dynamics and market power," UC3M Working papers. Economics 3906, Universidad Carlos III de Madrid. Departamento de Economía.
  11. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  12. 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.
  13. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  14. Omar Licandro, 1995. "A Non-Walrasian General Equilibrium Model with Monopolistic Competition and Wage Bargaining," Annals of Economics and Statistics, GENES, issue 37-38, pages 237-253.
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