Atlantic Economic Journal

, Volume 29, Issue 2, pp 121–134 | Cite as

Endogenous capital utilization in a neoclassical growth model

  • Beatriz Rumbos
  • Leonardo Auernheimer
Articles

Abstract

This paper introduces 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. As a consequence, this rate may vary in the short run, so total services of capital become a control rather than a state variable. Furthermore, the introduction of a variable utilization rate yields a slower rate of convergence toward the steady state, inducing more persistence in the transitional dynamics. To illustrate how the endogenous choice of utilization acts on the system, some simulations are carried out, including the transition period when there is a temporary fall in the exogenous real interest rate.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ambler, Steve; Paquet Alain. "Stochastic Depreciation and the Business Cycle,"International Economic Review, 35, 1, February 1994, pp. 101–16.Google Scholar
  2. Auernheimer, Leonardo. "Variable Depreciation and Some of its Implications,"Canadian Journal of Economics, 9, 1, February 1986, pp. 99–113.Google Scholar
  3. Auernheimer, Leonardo; Saving, Thomas. "Market Organization and the Durability of Durable Goods,"Econometrica, 45, 1, January 1977, pp. 219–28.Google Scholar
  4. Barro, Robert, J.; Sala-i-Martin, Xavier. "Convergence,"Journal of Political Economy, 100, 2, April 1992, pp. 223–51.CrossRefGoogle Scholar
  5. __Economic Growth, New York, NY: McGraw Hill, 1995.Google Scholar
  6. Bischoff, Charles, W.; Kokkelenberg, Edward, C. "Capacity Utilization and Depreciation in Use,"Applied Economics, 19, 8, August 1987, pp. 995–1007.Google Scholar
  7. Blanchard, Olivier; Ree, Changyong; Summers, Lawrence. "The Stock Market, Profit, and Investment,"Quarterly Journal of Economics, 108, 1, February 1993, pp. 115–36.Google Scholar
  8. Burnside, Craig; Eichenbaum, Martin; Rebelo, Sergio. "Capital Utilization and Returns to Scale," in Ben Bernanke; Julio Rotemberg, eds.,Macroeconomics Annual, 10, Cambridge, MA: MIT Press, 1995, pp. 67–110.Google Scholar
  9. Calvo, Guillermo, A. "Efficient and Optimal Utilization of Capital Services,"American Economic Review, 65, 1, March 1975, pp. 181–6.Google Scholar
  10. DeJong, David; Ingram, Beth; Whiteman, Charles. "Keynes vs. Prescott and Solow: Identifying Sources of Business Cycle Fluctuations," working paper, 95-06, University of Iowa, March 1995.Google Scholar
  11. Dejong, David; Ingram, Beth; Whiteman, Charles; Wen, Yi. "Cyclical Implications of the Variable Utilization of Physical and Human Capital," working paper, 96-12, University of Iowa, September 1996.Google Scholar
  12. Diewert, Erwin. "Walras' Theory of Capital Formation and the Existence of a Temporary Equilibrium," in G. Schwodiauer, ed.,Equlibrium and Disequlibrium in Economic Theory, Dordrecht, Netherlands: Reidel, 1978, pp. 73–126.Google Scholar
  13. Greenwood, Jeremy; Hercowitz, Zvi; Huffman, Gregory. "Investment, Capacity Utilization, and the Real Business Cycle,"American Economic Review, 78, June 1988, pp. 402–17.Google Scholar
  14. Johnson, Paul A. "Capital Utilization and Investment when Capital Depreciates in Use: Some Implications and Tests,"Journal of Macroeconomics, 16, 2, Spring 1994, pp. 243–59.CrossRefGoogle Scholar
  15. Keynes, John M.The General Theory of Employment, Interest, and Money, London, United Kingdom: Macmillan, 1936.Google Scholar
  16. Licandro, Omar; Puch, Luis. "Capital Utilization, Maintenance Costs, and the Business Cycle," working paper, Universidad Carlos III de Madrid, April 1996.Google Scholar
  17. Marshall, Alfred.Principles of Economics, London, United Kingdom: Macmillan, 1922.Google Scholar
  18. Swan, Peter L. "Durability of Consumption Goods,"American Economic Review, 50, December 1970, pp. 884–94.Google Scholar

Copyright information

© International Atlantic Economic Society 2001

Authors and Affiliations

  • Beatriz Rumbos
    • 1
  • Leonardo Auernheimer
    • 2
  1. 1.Instituto Tecnológico Autónomo de MéxicoMexico
  2. 2.Texas A&M UniversityU.S.A.

Personalised recommendations