Equilibrium business cycles with idle resources and variable capacity utilization

Thomas F. Cooley, Gary D. Hansen, Edward Prescott

Research output: Contribution to journalArticle

27 Citations (Scopus)

Abstract

A real business cycle economy is studied in which some capital is idle each period and the fraction of capital left idle varies in response to technology shocks. Previous equilibrium business cycle models have the characteristic that the entire stock of capital is used for production in each period. Our objective is to determine whether incorporating idle resources, something regularly observed in actual economies, significantly affects the cyclical properties of the model and hence changes our views about the importance of technology shocks for aggregate fluctuations. In our analysis we do not assume an aggregate production function, but instead model production as taking place at individual plants that are subject to idiosyncratic technology shocks. Each period the plant manager must choose whether to operate the plant or to let the plant remain idle. We find that the cyclical properties of this model are surprisingly similar to those of a standard real business cycle economy. One difference is that the model displays variation in factor shares while the standard models does not.

Original languageEnglish (US)
Pages (from-to)35-49
Number of pages15
JournalEconomic Theory
Volume6
Issue number1
DOIs
StatePublished - Feb 1995
Externally publishedYes

Fingerprint

Capacity utilization
Resources
Business cycles
Technology shocks
Real business cycles
Aggregate production function
Aggregate fluctuations
Managers
Factor shares
Business cycle model

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Equilibrium business cycles with idle resources and variable capacity utilization. / Cooley, Thomas F.; Hansen, Gary D.; Prescott, Edward.

In: Economic Theory, Vol. 6, No. 1, 02.1995, p. 35-49.

Research output: Contribution to journalArticle

Cooley, Thomas F. ; Hansen, Gary D. ; Prescott, Edward. / Equilibrium business cycles with idle resources and variable capacity utilization. In: Economic Theory. 1995 ; Vol. 6, No. 1. pp. 35-49.
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