Working Paper: NBER ID: w10446
Authors: Simon Gilchrist; John C. Williams
Abstract: We embed the microeconomic decisions associated with investment under uncertainty, capacity utilization, and machine replacement in a general equilibrium model based on putty-clay technology. In the presence of irreversible factor proportions, a mean-preserving spread in the productivity of investment raises aggregate investment, productivity, and output. Increases in uncertainty have important dynamic implications, causing sustained increases in investment and hours and a medium-term expansion in the growth rate of labor productivity.
Keywords: No keywords provided
JEL Codes: D24; E22; E23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the variance of project returns (G17) | reallocation of labor from low productivity to high productivity projects (J24) |
| reallocation of labor from low productivity to high productivity projects (J24) | aggregate investment (E22) |
| reallocation of labor from low productivity to high productivity projects (J24) | productivity (O49) |
| increase in the variance of project returns (G17) | expected profits (D33) |
| expected profits (D33) | aggregate economic activity (E10) |
| increase in uncertainty in project returns (D89) | sustained increases in investment (E22) |
| sustained increases in investment (E22) | growth rate of labor productivity (O49) |
| increase in uncertainty (D89) | productivity gains (O49) |