Investment, Capacity, and Output: A Putty-Clay Approach

Board of Governors of the Federal Reserve System Working Paper No. 98-44

34 Pages Posted: 8 Mar 1999

See all articles by John C. Williams

John C. Williams

Federal Reserve Bank of New York

Simon Gilchrist

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

Date Written: November 16, 1998

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.

JEL Classification: D24, E22, E23

Suggested Citation

Williams, John C. and Gilchrist, Simon, Investment, Capacity, and Output: A Putty-Clay Approach (November 16, 1998). Board of Governors of the Federal Reserve System Working Paper No. 98-44. Available at SSRN: https://ssrn.com/abstract=148573 or http://dx.doi.org/10.2139/ssrn.148573

John C. Williams (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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

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