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Variable Capital Utilization in a General Equilibrium, "Supply Side" Model

Leonardo Auernheimer and Beatriz Rumbos ()
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Beatriz Rumbos: Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)

No 9704, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: We introduce a variable rate of capital utilization and depreciation into a modified Ramsey- type neoclassical growth model via the well-known concept of pure user cost. The optimal utilization rate is found to be determined by the opportunity cost of holding capital or the net real interest rate, and this rate may vary in the short run so total services of capital become a control rather than a state variable. We find a slower rate of convergence towards the steady state when a variable utilization rate of capital is introduced, and a response to certain shocks that exhibit a higher (than in the non-flexibility case) persistence. Noteworthy is the case when a (technology) shock is anticipated; with the initial response of output in a direction opposite to that of the final adjustment. Finally, it is found that, contrary to the conventional case in which capital utilization is fixed, a fall (rise) in the interest rate can have an important contractionary (expansionary) effect on output and wages.

Pages: 29 pages
Date: 1997
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Handle: RePEc:cie:wpaper:9704