Is Investment-Specific Technological Change Really Important for Business Cycles?

Is Investment-Specific Technological Change Really Important for Business Cycles?

This paper re-examines the effect of investment-specific technology shocks (I-shocks) on the business cycles from a theoretical angle. I show that Greenwood, Hercowitz and Krusell’s (GHK, 2000) influential specification may overstate the contribution of I-shocks to business cycles because it produces an unrealistically high volatility of capital utilization relative to output. The reason for this is that they model only one type of cost to increasing capital utilization, an accelerated depreciation. This paper introduces worker disutility for a longer nonstandard workweek as another cost of capital utilization, which generates volatility of capital utilization relative to output quite close to what we see in the data. Adding worker disutility to the GHK model reduces the importance of I-shocks by almost 60%, cautioning against the idea that I-shocks can be a sizable contributor to output fluctuation.