Working Paper

Investment, capacity, and output: a putty-clay approach

Abstract: In this paper, we embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. We show that the combination of log-normally distributed idiosyncratic productivity uncertainty and Leontief utilization choice yields an aggregate production function that is easily characterized in terms of hazard rates for the standard normal distribution. At low levels of idiosyncratic uncertainty, the short-run elasticity of supply is substantially lower than the elasticity of supply obtained from a fully-flexible Cobb-Douglas alternative. In the presence of irreversible factor proportions, an increase in idiosyncratic uncertainty typically reduces investment at the micro level but increases aggregate investment. Finally, we study the relationship between growth and uncertainty on aggregate capacity utilization and rates of machine replacement and investigate the factors that affect the magnitude of replacement echoes.

Keywords: Industrial capacity; Macroeconomics; Production (Economic theory);

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 1998

Number: 1998-44