FACTOR-HOARDING AND THE PROPAGATION OF BUSINESS-CYCLE SHOCKS

This paper analyzes the role of variable capital-utilization rates in propagating shocks over the business cycle. The model on which our ana lysis is based treats variable capital-utilization rates as a form of factor-hoarding. We argue that variable capital-utilization rates are a quantitatively important source of propagation to business-cycle sho cks. With this additional source of propagation, the volatility of exo genous technology shocks needed to explain the observed variability in aggregate U.S. output is significantly reduced relative to standard r eal-business-cycle models.