Capacity constraints, asymmetries, and the business cycle

Gary D. Hansen, Edward Prescott

Research output: Contribution to journalArticle

36 Scopus citations

Abstract

We study how an occasionally binding capacity constraint affects the properties of business cycles. A real business cycle model is constructed where production takes place at individual plants and the number of plants operated varies over the cycle. The capacity constraint binds in states where all plants are operated. We derive the aggregate production function for this economy, which turns out to differ from the standard Cobb-Douglas function while retaining its desirable properties. The business cycle features of this one-sector growth model are similar to those of a standard real business cycle model in most respects. Our model does, however, display some properties of actual economies that standard models do not. In particular, business cycles in our model are asymmetric-troughs are deeper on average than peaks are tall. Also, labor's share of income is counter-cyclical, as it is in US data.

Original languageEnglish (US)
Pages (from-to)850-865
Number of pages16
JournalReview of Economic Dynamics
Volume8
Issue number4
DOIs
StatePublished - Oct 1 2005

Keywords

  • Asymmetric business cycles
  • Capacity utilization
  • Real business cycles

ASJC Scopus subject areas

  • Economics and Econometrics

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