Maintenance expenditures and indeterminacy under increasing returns to scale
This paper develops a one-sector real business cycle model in which competitive firms allocate resources for the production of goods, investment in new capital, and maintenance of existing capital. Firms also choose the utilization rate of existing capital. A higher utilization rate leads to faster capital depreciation, while an increase in maintenance activity has the opposite effect. We show that as the equilibrium ratio of maintenance expenditures to GDP rises, the required degree of increasing returns for local indeterminacy declines over a wide range of parameter combinations. When the model is calibrated to match empirical evidence on the relative size of maintenance and repair activity, we find that local indeterminacy (and belief-driven fluctuations) can occur with a mild and empirically-plausible degree of increasing returns–around 1.08.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (415) 974-2000
Fax: (415) 974-3333
Web page: http://www.frbsf.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benhabib Jess & Farmer Roger E. A., 1994.
"Indeterminacy and Increasing Returns,"
Journal of Economic Theory,
Elsevier, vol. 63(1), pages 19-41, June.
- Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
- Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
- Benhabib, Jess & Farmer, Roger E.A., 1991. "Indeterminacy and Increasing Returns," Working Papers 91-59, C.V. Starr Center for Applied Economics, New York University.
- Pintus, Patrick A., 2004. "Expectations-Driven Fluctuations When Factor Utilization Is Variable," Macroeconomic Dynamics, Cambridge University Press, vol. 8(01), pages 3-26, February.
- 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.
- Ellen R. McGrattan & James A. Schmitz, Jr., 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
- Farmer Roger E. A. & Guo Jang-Ting, 1994.
"Real Business Cycles and the Animal Spirits Hypothesis,"
Journal of Economic Theory,
Elsevier, vol. 63(1), pages 42-72, June.
- Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
- Benhabib, Jess & Nishimura, Kazuo, 1996.
"Indeterminancy and Sunspots with Constant Returns,"
96-44, C.V. Starr Center for Applied Economics, New York University.
- Weder, Mark, 2000.
"Animal spirits, technology shocks and the business cycle,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 24(2), pages 273-295, February.
- Weder, Mark, 1997. "Animal spirits, technology shocks and the business cycle," SFB 373 Discussion Papers 1997,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
- Benhabib, J. & Meng, Q. & Nishimura, K., 1999.
"Indeterminacy Under Constant Returns to Scale in Multisector Economies,"
99-17, C.V. Starr Center for Applied Economics, New York University.
- Jess Benhabib & Qinglai Meng & Kazuo Nishimura, 2000. "Indeterminacy under Constant Returns to Scale in Multisector Economies," Econometrica, Econometric Society, vol. 68(6), pages 1541-1548, November.
- Basu, Susanto & Fernald, John G, 1997.
"Returns to Scale in U.S. Production: Estimates and Implications,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 249-83, April.
- Susanto Basu & John G. Fernald, 1996. "Returns to scale in U.S. production: estimates and implications," International Finance Discussion Papers 546, Board of Governors of the Federal Reserve System (U.S.).
- Guo, Jang-Ting & Harrison, Sharon G., 2001. "Indeterminacy with capital utilization and sector-specific externalities," Economics Letters, Elsevier, vol. 72(3), pages 355-360, September.
- repec:cup:macdyn:v:8:y:2004:i:1:p:3-26 is not listed on IDEAS
- Harrison, Sharon G., 2001. "Indeterminacy in a model with sector-specific externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 747-764, May.
- Wen, Yi, 1998. "Capacity Utilization under Increasing Returns to Scale," Journal of Economic Theory, Elsevier, vol. 81(1), pages 7-36, July.
- Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April.
When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:2005-10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger)
If references are entirely missing, you can add them using this form.