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Investment, capacity, and output: a putty-clay approach

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  • Simon Gilchrist
  • John Williams

Abstract

In this paper, we embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. We show that the combination of log-normally distributed idiosyncratic productivity uncertainty and Leontief utilization choice yields an aggregate production function that is easily characterized in terms of hazard rates for the standard normal distribution. At low levels of idiosyncratic uncertainty, the short-run elasticity of supply is substantially lower than the elasticity of supply obtained from a fully-flexible Cobb-Douglas alternative. In the presence of irreversible factor proportions, an increase in idiosyncratic uncertainty typically reduces investment at the micro level but increases aggregate investment. Finally, we study the relationship between growth and uncertainty on aggregate capacity utilization and rates of machine replacement and investigate the factors that affect the magnitude of replacement echoes.

Suggested Citation

  • Simon Gilchrist & John Williams, 1998. "Investment, capacity, and output: a putty-clay approach," Finance and Economics Discussion Series 1998-44, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-44
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    References listed on IDEAS

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    7. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
    8. Cooper, Russell & Haltiwanger, John, 1993. "The Aggregate Implications of Machine Replacement: Theory and Evidence," American Economic Review, American Economic Association, vol. 83(3), pages 360-382, June.
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    11. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
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    Cited by:

    1. Susanto Basu & John Fernald, 2001. "Why Is Productivity Procyclical? Why Do We Care?," NBER Chapters, in: New Developments in Productivity Analysis, pages 225-302, National Bureau of Economic Research, Inc.
    2. Mark Lasky, 2007. "Output, Investment, and Growth in a World of Putty-Clay: Working Paper 2007-07," Working Papers 18701, Congressional Budget Office.
    3. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.

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