Putty-Clay and Investment: A Business Cycle Analysis

44 Pages Posted: 16 Oct 1998

See all articles by Simon Gilchrist

Simon Gilchrist

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

John C. Williams

Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 1998

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.

JEL Classification: D24, E22, E32

Suggested Citation

Gilchrist, Simon and Williams, John C., Putty-Clay and Investment: A Business Cycle Analysis (June 23, 1998). Federal Reserve Board FEDS Paper No. 98-30. Available at SSRN: https://ssrn.com/abstract=113568 or http://dx.doi.org/10.2139/ssrn.113568

Simon Gilchrist

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John C. Williams (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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