Keywords: Putty-clay, vintage capital, business cycle, irreversibility, capacity utilization
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.
Full paper (688 KB PDF)
| Full paper (957 KB Postscript)
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