CAN CAPACITY CONSTRAINTS EXPLAIN ASYMMETRIES OF THE BUSINESS CYCLE?

Malte Knüppel

Macroeconomic Dynamics, 2014, vol. 18, issue 1, 65-92

Abstract: In this paper, we investigate the ability of a modified real business cycle (RBC) model to reproduce asymmetries observed for macroeconomic variables over the business cycle. To replicate the empirical skewness of major U.S. macroeconomic variables, we introduce a capacity constraint into an otherwise prototypical RBC model. This constraint emerges because of the assumption of kinked marginal costs of utilization, where the kink is located at a utilization rate of 100%. We find that a model with a suitably calibrated cost function reproduces the empirical coefficients of skewness remarkably well.

Date: 2014
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Working Paper: Can capacity constraints explain asymmetries (2008)
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