EQUILIBRIUM BUSINESS CYCLES WITH IDLE RESOURCES AND VARIABLE CAPACITYUTILIZATION

A real business cycle economy is studied in which some capital is idle each period and the fraction of capital left idle varies in response to technology shocks. Previous equilibrium business cycle models have the characteristic that the entire shock of capital is used for produc tion in each period. Our objective is to determine whether incorporati ng idle resources, something regularly observed in actual economies, s ignificantly affects the cyclical properties of the model and hence ch anges our views about the importance of technology shocks for aggregat e fluctuations. In our analysis we do not assume an aggregate producti on function, but instead model production as taking place at individua l plants that are subject to idiosyncratic technology shocks. Each per iod the plant manager must choose whether to operate the plant or to l et the plant remain idel. We find that the cyclical properties of this model are surprisingly similar to those of a standard real business c ycle economy. One difference is that the model displays variation in f actor shares while the standard models does not.