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Investment, Capacity Utilization and the Real Business Cycle
01 Jan 1986-The American Economic Review (Institute for International Economic Studies, Stockholm University)-Vol. 78, Iss: 3, pp 402-417
TL;DR: In this article, the authors adopt the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporate them in a neo-classical framework where the rate of capital expenditure is fixed.
Abstract: The present paper adopts the Keynesian view that direct shocks to investment are important for business fluctuations, but incorporates them in a neo-classical framework where the rate of capital ut ...
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TL;DR: Using a Bayesian likelihood approach, the authors estimate a dynamic stochastic general equilibrium model for the US economy using seven macroeconomic time series, incorporating many types of real and nominal frictions and seven types of structural shocks.
Abstract: Using a Bayesian likelihood approach, we estimate a dynamic stochastic general equilibrium model for the US economy using seven macro-economic time series. The model incorporates many types of real and nominal frictions and seven types of structural shocks. We show that this model is able to compete with Bayesian Vector Autoregression models in out-of-sample prediction. We investigate the relative empirical importance of the various frictions. Finally, using the estimated model we address a number of key issues in business cycle analysis: What are the sources of business cycle fluctuations? Can the model explain the cross-correlation between output and inflation? What are the effects of productivity on hours worked? What are the sources of the "Great Moderation"?
3,155 citations
TL;DR: In this paper, a dynamic stochastic general equilibrium (DSGE) model for the US economy is proposed, which incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production.
Abstract: We estimate a dynamic stochastic general equilibrium (DSGE) model for the US economy. The model incorporates many types of real and nominal frictions: sticky nominal price and wage setting, habit formation in consumption, investment adjustment costs, variable capital utilisation and fixed costs in production. It also contains many types of shocks including productivity, labour supply, investment, preference, cost-push and monetary policy shocks. Using Bayesian estimation techniques, the relative importance of the various frictions and shocks in explaining the US business cycle are empirically investigated. We also show that this model is able to outperform standard VAR and BVAR models in out-of-sample prediction.
3,115 citations
TL;DR: In this paper, a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area was developed and estimated with Bayesian techniques using seven key macroeconomic variables: GDP, consumption, investment, prices, real wages, employment, and the nominal interest rate.
Abstract: This paper develops and estimates a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilization. It is estimated with Bayesian techniques using seven key macroeconomic variables: GDP, consumption, investment, prices, real wages, employment, and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labor supply, investment, preference, cost-push, and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle e uctuations in the euro area. Using the estimated model, we also analyze the output (real interest rate) gap, dee ned as the difference between the actual and model-based potential output (real interest rate). (JEL: E4, E5)
2,767 citations
01 Oct 2002
TL;DR: In this article, a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area was developed and estimated with Bayesian techniques using seven key macroeconomic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate.
Abstract: This paper develops and estimates a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate).
2,716 citations
TL;DR: In this paper, a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity is used to analyze how movements in the distribution of income and wealth affect the macroeconomy.
Abstract: How do movements in the distribution of income and wealth affect the macroeconomy? We analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity. Our main finding is that, in the stationary stochastic equilibrium, the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution. This result is robust to substantial changes in both parameter values and model specification. Our benchmark model, whose only difference from the representative‐agent framework is the existence of uninsurable idiosyncratic risk, displays far less cross‐sectional dispersion and skewness in wealth than U.S. data. However, an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data. Furthermore, this extension features aggregate time series that depart significantly from permanent income behavior.
2,205 citations
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Book•
01 Jan 1936
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.
15,146 citations
13,200 citations
TL;DR: In this article, a general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period, with the assumption that more than one time period is required for the construction of new productive capital and the non-time-separable utility function that admits greater intertemporal substitution of leisure.
Abstract: The equilibrium growth model is modified and used to explain the cyclical variances of a set of economic time series, the covariances between real output and the other series, and the autocovariance of output. The model is fitted to quarterly data for the post-war U.S. economy. Crucial features of the model are the assumption that more than one time period is required for the construction of new productive capital, and the non-time-separable utility function that admits greater intertemporal substitution of leisure. The fit is surprisingly good in light of the model's simplicity and the small number of free parameters. THAT WINE IS NOT MADE in a day has long been recognized by economists (e.g., Bdhm-Bawerk [6]). But, neither are ships nor factories built in a day. A thesis of this essay is that the assumption of multiple-period construction is crucial for explaining aggregate fluctuations. A general equilibrium model is developed and fitted to U.S. quarterly data for the post-war period. The co-movements of the fluctuations for the fitted model are quantitatively consistent with the corresponding co-movements for U.S. data. In addition, the serial correlations of cyclical output for the model match well with those observed. Our approach integrates growth and business cycle theory. Like standard growth theory, a representative infinitely-lived household is assumed. As fluctuations in employment are central to the business cycle, the stand-in consumer values not only consumption but also leisure. One very important modification to the standard growth model is that multiple periods are required to build new capital goods and only finished capital goods are part of the productive capital stock. Each stage of production requires a period and utilizes resources. Halffinished ships and factories are not part of the productive capital stock. Section 2 contains a short critique of the commonly used investment technologies, and presents evidence that single-period production, even with adjustment costs, is inadequate. The preference-technology-information structure of the model is presented in Section 3. A crucial feature of preferences is the non-time-separable utility function that admits greater intertemporal substitution of leisure. The exogenous stochastic components in the model are shocks to technology and imperfect indicators of productivity. The two technology shocks differ in their persistence.
5,728 citations
TL;DR: In this paper, the theory of interest was restated and the output of capital goods and of consumption was analyzed in terms of uncertainty and fluctuations of investment, and demand and supply for output as a whole.
Abstract: I. Comments on the four discussions in the previous issue of points in the General Theory, 209. — II. Certain definite points on which the writer diverges from previous theories, 212. — The theory of interest restated, 215. — Uncertainties and fluctuations of investment, 217. — III. Demand and Supply for output as a whole, 219. — The output of capital goods and of consumption, 221.
5,476 citations
TL;DR: In this paper, a growth model with shocks to technology is studied, and it is shown that, unlike previous equilibrium models of the business cycle, this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity.
2,238 citations