Essays on the business cycle

Abstract

"Much as I hate to spoil my story by announcing its plot in advance, this paper is too long and involved to be clear otherwise. It deals with growth of investment and of capital stock subject to depreciation and periodic replacement. " E. Domar The above citation is taken from a piece, Depreciation Replacement and Growth, written by Evsey Domar in 1953. A few years later he will write Depreciation Replacement and Growth - and Fluctuations. The theme of the replacement of capital and its role for fluctuations is old. So why write paper at the beginning of the 21st century on this same subject? My answer is that this matter has become increasingly important in time. Never before have pieces of productive assets been replaced at the pace that firms today renew their computers and related equipment. This has caused a dramatic shift in the nature of depreciation: from an exogenous to an endogenous phenomenon. The first two essays of this thesis focus on the acceleration of replacement and its consequences for the propagation of nominal shocks in a neoclassical economy. To paraphrase Domar it deals with fluctuations of investment and of capital stock subject to depreciation and endogenous replacement. In the first essay I document the extent of the acceleration in replacement that the US economy has experienced in the last three decades and derive a few implications for the investment behavior of firms in a partial equilibrium setup. The main result is that firms can now respond to demand shifts by postponing or accelerating the replacement of their capital stock.

(cont.) The second essay takes the analysis to general equilibrium and suggests that changes in the money supply have become a less powerful instrument in stimulating aggregate investment relative to aggregate consumption.The third essay:is not directly related to depreciation but is an empirical investigation on the sources of economic fluctuations. Again the theme does not appear to be...fresh. Still the academic consensus is far from being unanimous on such an old question. The approach taken in this last essay follows from a note by Olivier Blanchard in his introductory Macroeconomics class notes. It consists in identifying the sources of fluctuations at a disaggregated level and investigate which of the different sources generate comovements that sum up to aggregate fluctuations. The main results are the shocks that aggregate into the aggregate source of fluctuations are neither technological nor restructuring shocks.