Variable Capacity Utilization Research Articles

A search-based neoclassical model of capital reallocation

Abstract The purchase of used capital accounts for at least 25% of firms’ total investment and more importantly, cross-firm reallocation of used capital exhibits intriguing business-cycle properties, such as (i) the quantity of capital reallocated is procyclical; (ii) the prices of used capital are procyclical and more so than those of new capital; (iii) the benefits to capital reallocation—measured by the dispersion of firms’ TFP—is countercyclical; and (iv) the dispersion of firms’ gross investment rates is procyclical despite the fact that the dispersion of firms’ Tobin q is countercyclical. This set of stylized facts do not seem to be mutually consistent with each other; e.g., the third stylized fact appears contradicting the first stylized fact since the quantity of capital reallocation is expected to be larger when the benefits to capital reallocations are greater. We build a search-based neoclassical model with variable capacity utilization to explain these seemingly “contradictory” facts. We show that search frictions in the capital markets are essential for our empirical success but not sufficient—the right type of aggregate shocks (i.e., shocks to the matching efficiency instead of aggregate TFP) are also important for simultaneously accounting for all the stylized facts, especially regarding the dispersion of firm-level TFP and the dispersion of firms’ investment rate.

Impacts of two-stage deterioration on an integrated inventory model under trade credit and variable capacity utilization

The joint economic lot sizing problem (JELP) model provides a global view to facilitate the development of a production-inventory policy for an integrated system. However, when a deteriorating item is involved, previous studies have neglected the following two important issues: (1) the deterioration quantity increases the demand for the supplier's capacity, which consequently requires the supplier to recalculate the corresponding average cost and reevaluate the capacity utilization, and (2) given the supplier's production rate, in-transit deterioration imposes restrictions on the delivery distance or in-transit time. Therefore, the existing integrated policies may lead to infeasible solutions for the distribution channel when a deterioration item is included. In view of these two issues, a generalized JELP model under delay in payments is formulated to investigate the integrated production-inventory policy for an item with two-stage deterioration (in-transit and retail deterioration) while incorporating both transportation time and capacity utilization. By developing the average cost functions of the supply chain members and employing several new definitions (e.g., variable capacity utilization), this paper provides a mechanism for measuring the influence of two-stage deterioration on the supplier's capacity utilization for the JELP. Three algorithms are proposed to obtain optimal decisions based on the theoretical results. This paper demonstrates that the supplier's variable capacity utilization is relevant to transportation time and two-stage deterioration, which can be applied to evaluate the feasibility of the integrated production-inventory policy for the deteriorating item. Furthermore, there is a maximum allowable value for the retailer's order cycle.

On sunspot fluctuations in variable capacity utilization models

We investigate the extent to which standard one sector RBC models with positive externalities and variable capacity utilization can account for the large hump-shaped response of output when the model is submitted to a pure sunspot shock. We refine the Benhabib and Wen (2004) model considering a general type of additive separable preferences and a general production function. We provide a detailed theoretical analysis of local stabilities and local bifurcations as a function of various structural parameters. We show that, when labor is infinitely elastic, local indeterminacy occurs through Flip and Hopf bifurcations for a large set of values for the elasticity of intertemporal substitution in consumption, the degree of increasing returns to scale and the elasticity of capital–labor substitution. Finally, we provide a detailed quantitative assessment of the model and conclude with mixed results. We show that although the model is able theoretically to generate a hump-shaped dynamics of output following an i.i.d. sunspot shock under realistic parameter values, the hump is too persistent for the model to be considered fully satisfactory from an empirical point of view.

How Large Are Returns to Scale in the U.S.? A View Across the Boundary

I study the degree of returns to scale in aggregate U.S. data by estimating the standard RBC model with and without variable capacity utilization using Bayesian methods. The source of increasing returns is the presence of an externality in production. I find that, at best, returns are mildly increasing at a level statistically indistinguishable from the constant-returns case. A high enough degree of increasing returns is needed to support equilibrium indeterminacy and sunspot-driven business cycle fluctuations. In my estimation results, I find that I can conclusively rule out this possibility on account of a low estimated degree of increasing returns and a fairly inelastic labor supply.

THE ROLE OF INVESTMENT-SPECIFIC TECHNOLOGY SHOCKS IN DRIVING INTERNATIONAL BUSINESS CYCLES: A BAYESIAN APPROACH

This paper uses a Bayesian approach to estimate a standard international real business cycle model augmented with preferences with zero wealth effect, variable capacity utilization, and investment adjustment costs. First, I find that the bulk of fluctuations in country-specific outputs, consumption, investments, and international relative prices can be attributed to country-specific neutral technology, investment-specific technology, and preference shocks. Second, my estimated model with economically meaningful shocks simultaneously accounts for the negative correlation between the real exchange rate and relative consumption and the negative correlation between the terms of trade and relative output. Last, through a marginal likelihood comparison exercise, I find that the success of the model depends on preferences with zero wealth effects; other frictions and alternative asset market structures play a less important role.

FACTOR DETERMINANTS OF TOTAL FACTOR PRODUCTIVITY GROWTH FOR THE JAPANESE MANUFACTURING INDUSTRY

This study uses industrial panel data for Japanese manufacturing to estimate the sources of productivity growth by simultaneously considering embodied technical progress, spillover effects, and openness, after controlling for returns to scale, imperfect competition, and capacity utilization. Estimation results show the existence of considerable embodied technical progress and interindustry externalities of capital investments positively affecting productivity growth. Furthermore, embodied technical progress causes research and development (R&D) capital to affect productivity growth insignificantly, suggesting that the impact of R&D is realized only after being embodied into other capitals. From sector‐wise estimations, we notice differences in factors affecting productivity growth between the durable and nondurable manufacturing sectors. (JEL D24, O30)

Endogenous fluctuations, markups, capacity and credit constraints

In the present paper endogenous fluctuations have been generated by referring to endogenous markups, variable capacity utilization, and credit constraints. As one can detect, they are the same ingredients as those used to generate the so called selffulfilling cycles. With respect to this strand of literature, three changes are introduced. First of all, credit constraints are conceived within the Minsky’s financial instability hypothesis. Secondly, markups may have different dynamic patterns and impacts. Finally, heterogeneous agents are assumed to form evolutionary expectations. The results of these interacting aggregate demand and supply aspects are endogenous fluctuations obtained by means of simulations. Robust limit cycles and interesting comovements between variables are achieved in this medium-run model.

Investment Shocks, Capacity Utilization, and Endogenous Entries

This paper studies a model that includes investment-specific technological shocks, a variable capacity utilization rate, and endogenous product entry subject to sunk product development costs. These factors constitute a powerful amplification mechanism as they interact with each other. The model generates an economic boom in a state in which people anticipate a future endogenous productivity rise; replicates the empirical patterns of economic fluctuations, both at the business cycle frequency and at a medium frequency; and replicates the empirical negative correlation between the net entry rates and the real investment prices over business cycles.

Consumption response to investment shocks under financial frictions

Consumption falls counter-factually on impact for investment-specific technology shocks, which, recent literature suggests, are important drivers of business cycles. Introducing financial frictions and variable capacity utilization to the standard New-Keynesian setup can overturn this co-movement problem, without imposing restrictions on wealth effects, or wage rigidities.

Cambridge and neo-Kaleckian growth and distribution theory: comparison with an application to fiscal policy

This paper compares Cambridge and neo-Kaleckian growth theory. Both are members of the post-Keynesian approach to growth and distribution, but the Cambridge model is a hybrid of Keynesian and classical features whereas the neo-Kaleckian model is Keynesian. The Cambridge approach assumes full capacity utilization, while the neo-Kaleckian approach assumes variable capacity utilization. The two theories rely on fundamentally different theories of income distribution. The Cambridge model has a class structure of saving that generates Pasinetti’s (1962) theorem regarding irrelevance of worker saving for steady-state growth and distribution. That class structure can be included in the neoKaleckian model, generating a variant of the Pasinetti result whereby steady-state capacity utilization is independent of worker saving. Fiscal policy has similar growth effects in the two models, albeit via very different mechanisms. Both models suffer from lack of attention to the labor market.

What's News in Business Cycles

In this paper, we perform a structural Bayesian estimation of the contribution of anticipated shocks to business cycles in the postwar United States. Our theoretical framework is a real-business-cycle model augmented with four real rigidities: investment adjustment costs, variable capacity utilization, habit formation in consumption, and habit formation in leisure. Business cycles are assumed to be driven by permanent and stationary neutral productivity shocks, permanent investment-specific shocks, and government spending shocks. Each of these driving forces is buffeted by four types of structural innovations: unanticipated innovations and innovations anticipated one, two, and three quarters in advance. We find that anticipated shocks account for more than two thirds of predicted aggregate fluctuations.

Chaos and capacity utilization under increasing returns to scale

Abstract It has been shown that adding variable capacity utilization of capital to a one-sector model with a mild production externality can produce local indeterminacy. In this paper, I provide a global analysis of this model and provide sufficient conditions for the existence of Euler equation branching. I show that this branching allows for regime switching equilibria implying ω-chaos and positive topological entropy – two notions of chaotic behavior.

Understanding the aggregate effects of anticipated and unanticipated tax policy shocks

This paper evaluates the extent to which a DSGE model can account for the impact of tax policy shocks. We estimate the response of macroeconomic aggregates to anticipated and unanticipated tax shocks in the US and find that unanticipated tax cuts have persistent expansionary effects on output, consumption, investment and hours worked. Anticipated tax cuts give rise to contractions in output, investment and hours worked prior to their implementation, while stimulating the economy when implemented. We show that a DSGE model can account quite successfully for these findings. The main features of the model are adjustment costs, consumption durables, variable capacity utilization and habit formation.

Technology Shocks: Novel Implications for International Business Cycles

Understanding the joint dynamics of international prices and quantities remains a central issue in international business cycles. International relative prices appreciate when domestic consumption and output increase more than their foreign counterparts. In addition, both trade flows and trade prices display sizable volatility. This paper incorporates Hicks-neutral and investment-specific technology shocks into a standard two-country general equilibrium model with variable capacity utilization and weak wealth effects on labor supply. Investment-specific technology shocks introduce a source of fluctuations in absorption similar to taste shocks, thus reconciling theory and data. The paper also presents implications for the transmission mechanism of technology shocks across countries and for the Barro and King (1984) critique of investment shocks.

Technology Shocks: Novel Implications for International Business Cycles

Understanding the joint dynamics of international prices and quantities remains a central issue in international business cycles. International relative prices appreciate when domestic consumption and output increase more than their foreign counterparts. In addition, both trade flows and trade prices display sizable volatility. This paper incorporates Hicks-neutral and investment-specific technology shocks into a standard two-country general equilibrium model with variable capacity utilization and weak wealth effects on labor supply. Investment-specific technology shocks introduce a source of fluctuations in absorption similar to taste shocks, thus reconciling theory and data. The paper also presents implications for the transmission mechanism of technology shocks across countries and for the Barro and King (1984) critique of investment shocks.

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INDETERMINACY IN CASH-IN-ADVANCE MODELS AND THE ROLE OF FRICTIONS

A monetary cash-in-advance model is known to be prone to real indeterminacy if the intertemporal elasticity of substitution in consumption is sufficiently low. Moreover, if the model features habit formation in consumption, the scope of indeterminacy increases substantially. This paper shows that many of the nominal frictions and real rigidities commonly used in the New Keynesian paradigm act to decrease the scope of this indeterminacy. These frictions include stickiness in prices and wages, adjustment costs in investment, and variable capacity utilization. When they are all used together in the model, the problem of indeterminacy nearly vanishes, even when habit formation in consumption is allowed.

Inflation and output dynamics in a model with labor market search and capital accumulation

In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy.

Variable capacity utilization, ambient temperature shocks and generation asset valuation

This paper discusses generation asset valuation in a framework where capital utilization decisions are endogenous. We use real options approach for valuation of natural gas fueled turbines. Capital utilization choices that we explore include turning on/off the unit, operating the unit at increased firing temperatures (overfiring), and conducting preventive maintenance. Overfiring provides capacity enhancement which comes at the expense of reduced maintenance interval and increased costs of part replacement. We consider the costs and benefits of overfiring in attempt to maximize the asset value by optimally exercising the overfire option. In addition to stochastic processes governing prices, we incorporate an exogenous productivity shock: ambient temperature. We consider how variation in ambient temperature affects the asset value through its effect on gas turbine's productivity.

Bifurcation and sunspots in the continuous time equilibrium model with capacity utilization

In the present paper, we construct a continuous time model of economic growth with positive externalities and with variable capacity utilization, and study the global equilibrium paths in this model. If there is a homoclinic orbit or a periodic solution in this model, equilibrium is globally indeterminate. We show that positive externalities can yield multiple steady states, a one‐parameter family of homoclinic orbits, and a two‐parameter family of periodic solutions. It is also shown that there exists a sunspot equilibrium in this model.