Factor-Hoarding and the Propagation of Business-Cycle Shocks

Abstract: This paper analyzes the role of variable capital-utilization rates in propagating shocks over the business cycle. The model on which our analysis  is based treats variable capital-utilization rates as a form of factor-hoarding. We argue  that variable capital-utilization rates are a quantitatively  important source of propagation to business-cycle shocks. With this additional source of propagation, the volatility of exogenous technology shocks needed to explain the observed variability in aggregate U.S. output is significantly reduced  relative to standard real business-cycle models.

Author(s): Craig Burnside and Martin Eichenbaum

5 Burnside & Eichenbaum 1996.pdf