Vintage Capital and Expectations Driven Business Cycles

Martin Floden ()

No 6113, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper demonstrates that increased optimism about future productivity can generate an immediate economic expansion in a neoclassical model with vintage capital and variable capacity utilization. Previous research has documented that standard neoclassical models cannot generate a simultaneous increase in consumption, investment, and hours in response to news shocks, and that optimism in these models tends to reduce investment and hours. When technology is vintage specific, however, expectations of higher future productivity raise the demand for new vintages of capital relative to installed capital. Capital depreciates faster when utilization is high, but this depreciation only affects installed capital. The cost of high depreciation therefore falls when the value of installed capital falls. It is demonstrated here that with standard parameter values, more optimism raises utilization, consumption, investment, hours, and output.

Keywords: business cycles; capital-embodied technological change; expectations; news; vintage capital (search for similar items in EconPapers)
JEL-codes: E13 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2007-02

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Working Paper: Vintage Capital and Expectations Driven Business Cycles (2006)
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