Business Cycles with Cyclical Returns to Scale

40 Pages Posted: 15 Jun 2018 Last revised: 24 Jun 2023

See all articles by Jay Hyun

Jay Hyun

Alberta School of Business, University of Alberta

Ryan Kim

Johns Hopkins University

Byoungchan Lee

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: August 24, 2021

Abstract

We study business cycles with cyclical returns to scale. Contrary to tightly parameterized production functions (e.g., Cobb-Douglas and constant elasticity of substitution), we empirically identify strong input complementarity that leads to procyclical returns to scale. We, therefore, propose a flexible translog production function that allows complementarity-induced procyclical returns to scale. We integrate this function into a standard medium-scale dynamic stochastic general equilibrium (DSGE) model. Our estimated model with input complementarity (i) features procyclical returns to scale and acyclical price markups, (ii) better matches the cyclicality of factor shares, and (iii) significantly decreases the contribution of markup shocks to output fluctuations relative to those of the standard model.

Keywords: Business cycles, Translog production function, DSGE model, Returns to scale, Markup, Markup shocks

JEL Classification: C11, E23, E31, E32

Suggested Citation

Hyun, Jay and Kim, Ryan and Lee, Byoungchan, Business Cycles with Cyclical Returns to Scale (August 24, 2021). Available at SSRN: https://ssrn.com/abstract=3184050 or http://dx.doi.org/10.2139/ssrn.3184050

Jay Hyun (Contact Author)

Alberta School of Business, University of Alberta ( email )

11211 Saskatchewan Dr NW
Edmonton, Alberta T6G 2R6
Canada

Ryan Kim

Johns Hopkins University ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Byoungchan Lee

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
Hong Kong

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