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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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    1. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 445-469, August.
    2. 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.
    3. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    4. Cooley, Thomas F. & Greenwood, Jeremy & Yorukoglu, Mehmet, 1997. "The replacement problem," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 457-499, December.
    5. 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.
    6. Ando, Albert K, et al, 1974. "On the Role of Expectations of Price and Technological Change in an Investment Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 384-414, June.
    7. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    8. E. Sheshinski, 1967. "Balanced Growth and Stability in the Johansen Vintage Model," Review of Economic Studies, Oxford University Press, vol. 34(2), pages 239-248.
    9. Cass, David & Stiglitz, Joseph E, 1969. "The Implications of Alternative Saving and Expectations Hypotheses for Choices of Technique and Patterns of Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 586-627, Part II, .
    10. Leahy, John V & Whited, Toni M, 1996. "The Effect of Uncertainty on Investment: Some Stylized Facts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 64-83, February.
    11. Calvo, Guillermo A, 1976. "Optimal Growth in a Putty-Clay Model," Econometrica, Econometric Society, vol. 44(5), pages 867-878, September.
    12. Andrew Atkeson & Patrick J. Kehoe, 1995. "Putty-clay capital and energy," Working Papers 548, Federal Reserve Bank of Minneapolis.
    13. 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.
    14. Edmond S. Phelps, 1962. "Substitution, Fixed Proportions, Growth and Distribution," Cowles Foundation Discussion Papers 133, Cowles Foundation for Research in Economics, Yale University.
    15. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-233, March.
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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. 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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