The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Putty-Clay and Investment: A Business Cycle Analysis
Simon Gilchrist and John C. Williams

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.

Keywords: Putty-clay, vintage capital, business cycle, irreversibility, capacity utilization

Full paper (688 KB PDF) | Full paper (957 KB Postscript)

Home | Economic research and data | FR working papers | FEDS | 1998 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: August 3, 1998