Putty-clay and investment: a business cycle analysis

Simon Gilchrist and John Williams

No 1998-30, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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 hump-shaped response of hours, persistence in output growth, and positive comovement in the forecastable components of output and hours. Capacity constraints result in a 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.

Keywords: Business; cycles (search for similar items in EconPapers)
Date: 1998
New Economics Papers: this item is included in nep-dge and nep-tid
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Citations: View citations in EconPapers (31)

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Related works:
Journal Article: Putty-Clay and Investment: A Business Cycle Analysis (2000)
Working Paper: Putty-Clay and Investment: A Business Cycle Analysis (1998)
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