Human Capital Accumulation, Time to Build, and Business Cycles

In this paper I introduce human capital accumulation with time-to-build technology into a real business cycle model. The only driving force is an exogenous shock affecting the long-run equilibrium level of productivity. A positive shock is assumed to generate a rise in the long-run equilibrium level of productivity, which implies higher level of human capital. To realize the higher productivity, however, economic agents need to take some time (and some labor effort) for learning activity or human capital accumulation. This is a time-to-build technology. Similar assumptions are made for physical capital accumulation in some real business cycle models. A time-to-build technology is essential for theoretical implications of the model. Because it takes some time (and some labor effort) for human capital accumulation, a positive shock makes the near-future level of productivity higher than the present level as a result of time-to-build technology. So intertemporal substitution behavior leads to a recession in the present and the subsequent expansion. A shock in a time-to-build model can generate larger fluctuations of business cycles due to greater effects of intertemporal substitution. A time-to-build model can generate the S-shaped pattern of productivity growth in transition dynamics, which is evidenced empirically. Furthermore it can replicate the stylized fact that output growth is persistent, which cannot be explained by standard real business cycle models