Technology Commitment and the Cost of Economic Fluctuations

Garey Ramey and Valerie Ramey

No 3755, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When firms must make technology commitments, economic fluctuations impose costs in the form of ex post inefficiency in production technology. We present a general equilibrium model in which, due to the presence of technology commitment, greater volatility of productivity shocks leads to lower mean output. When learning-by-doing is incorporated, mean output becomes permanently lower as a consequence of higher volatility. The negative and persistent relationship between mean and variance of output implied by our model is strongly verified by the data. We estimate that observed volatility has imposed a cost amounting to almost two percentage points of U.S. GNP growth.

Date: 1991-06
Note: EFG
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