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

Author

Listed:
  • Leonardo Auernheimer

    (Texas A&M University College Station)

  • Beatriz Rumbos

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (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.

Suggested Citation

  • Leonardo Auernheimer & Beatriz Rumbos, 1997. "Variable Capital Utilization in a General Equilibrium, "Supply Side" Model," Working Papers 9704, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:9704
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    File URL: http://ftp.itam.mx/pub/academico/inves/rumbos/paper1.doc
    File Function: First version, 1997
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    Cited by:

    1. Edward E. Leamer & Christopher F. Thornberg, 2000. "Effort and Wages: A New Look at the Interindustry Wage Differentials," NBER Chapters, in: The Impact of International Trade on Wages, pages 37-84, National Bureau of Economic Research, Inc.
    2. Edward E. Leamer, 1999. "Effort, Wages, and the International Division of Labor," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1127-1162, December.

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