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A NOTE ON VARIABLE CAPITAL UTILIZATION IN GROWTH AND BUSINESS CYCLE THEORY

Published online by Cambridge University Press:  24 March 2014

Holger Strulik  and
Timo Trimborn
Holger Strulik
Affiliation:
University of Goettingen
Timo Trimborn*
Affiliation:
University of Goettingen
*
Address correspondence to: Timo Trimborn, Faculty of Economic Sciences, University of Goettingen, Platz der Goettinger Sieben 3, 37073 Goettingen, Germany; e-mail: timo.trimborn@wiwi.uni-goettingen.de.
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Abstract

It was always considered to be a major achievement of modern business cycle economics that it was solidly grounded in neoclassical growth theory. Preserving this joint foundation, however, imposes a discipline on the specification of models with variable capital utilization. In this note we show that conventional specifications of the depreciation cost of capital utilization and the labor supply elasticity, introduced into business cycle theory to generate a satisfactory amplification of shocks, entail counterfactual growth dynamics: the positive association between capital stock and GDP along the growth path turns negative. Across economies with access to the same technology, the economy with the lowest capital stock per capita is predicted to produce the highest output per capita. We compute lower and upper bounds for the involved elasticities between which these counterfactual dynamics are avoided.

Keywords

Business CyclesEconomic GrowthCapital UtilizationLabor Supply
Type
Notes
Information
Macroeconomic Dynamics , Volume 19 , Issue 7 , October 2015 , pp. 1622 - 1632
Copyright
Copyright © Cambridge University Press 2014 

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