The Correlation Between Consumption and Investment in a Model of Variable Capital Utilization With Shocks to the Marginal Efficiency of Investment

• Autor(a) principal: Ejarque, João
• Data de Publicação: 1997
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/89006

This paper investigates the role of variable utilization rates for capital in the context of a Real Business Cycle model with shocks to the marginal efficiency of investment. This type of shock induces a negative correlation between consumption and investment and a high volatility of the stock of capital. 1 find that procyclical capital utilization - despite shifting income and moving consumption and investment in the same direction - cannot solve these problems, and that specific assumptions about the utility specification are necessary to get the model moments in line with the data. The same model with constant capital utilization obtains more positive correlations between consumption and investment. Finally, no utility specification seems to reduce the high volatility of the capital stock, Even if shocks enter the model through the conventional technology channel, the transmission of these shocks to the depreciation rate of capital generates an excessive volatility of this stock when compared to the data.