Putty-Clay and Investment: A Business Cycle Analysis

44 Pages Posted: 16 Oct 1998

See all articles by Simon Gilchrist

Simon Gilchrist

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). Available at SSRN: https://ssrn.com/abstract=113568 or http://dx.doi.org/10.2139/ssrn.113568

Simon Gilchrist

National Bureau of Economic Research (NBER)

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John C. Williams (Contact Author)

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