NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Putty-Clay and Investment: A Business Cycle Analysis

Simon Gilchrist, John C. Williams

NBER Working Paper No. 6812
Issued in November 1998
NBER Program(s):   ME   EFG

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 lump-shaped response of hours, persistence in output growth, and positive comovement in the forecastable components of output and hours. Capacity constraints result in 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.

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Document Object Identifier (DOI): 10.3386/w6812

Published: Gilchrist, Simon and John C. Williams. "Putty-Clay And Investment: A Business Cycle Analysis," Journal of Political Economy, 2000, v108(5,Oct), 928-960.

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