Technology Commitment and the Cost of Economic Fluctuations

56 Pages Posted: 31 Jul 2007

See all articles by Garey Ramey

Garey Ramey

University of California, San Diego (UCSD) - Department of Economics

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Date Written: June 1991

Abstract

When firms must make technology commitments, economic fluctuations impose costs in the form of ex post inefficiency in production technology. We present a general equilibrium model in which, due to the presence of technology commitment, greater volatility of productivity shocks leads to lower mean output. When learning-by-doing is incorporated, mean output becomes permanently lower as a consequence of higher volatility. The negative and persistent relationship between mean and variance of output implied by our model is strongly verified by the data. We estimate that observed volatility has imposed a cost amounting to almost two percentage points of U.S. GNP growth.

Suggested Citation

Ramey, Garey and Ramey, Valerie A., Technology Commitment and the Cost of Economic Fluctuations (June 1991). NBER Working Paper No. w3755. Available at SSRN: https://ssrn.com/abstract=473931

Garey Ramey (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-5721 (Phone)
858-534-7040 (Fax)

Valerie A. Ramey

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2388 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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