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Putty-Clay and Investment: A Business Cycle Analysis

  • Simon Gilchrist
  • John C. Williams

This paper develops a dynamic stochastic general equilibrium model with putty-clay technology that incorporates embodied technology, investment irreversibility, and variable capacity utilization. Low short-run capital-labor substitutability native to the putty-clay framework induces the putty-clay effect of a tight link between changes in capacity and movements in employment and output. As a result, persistent shocks to technology or factor prices generate business cycle dynamics absent in standard neoclassical models, including a prolonged lump-shaped response of hours, persistence in output growth, and positive comovement in the forecastable components of output and hours. Capacity constraints result in nonlinear aggregate production function that implies asymmetric responses to large shocks with recessions steeper and deeper than expansions. Minimum distance estimation of a two-sector model that nests putty-clay and neoclassical production technologies supports a significant role for putty-clay capital in explaining business-cycle and medium-run dynamics.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6812.

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Date of creation: Nov 1998
Date of revision:
Publication status: published as Gilchrist, Simon and John C. Williams. "Putty-Clay And Investment: A Business Cycle Analysis," Journal of Political Economy, 2000, v108(5,Oct), 928-960.
Handle: RePEc:nbr:nberwo:6812
Note: ME EFG
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