Capital Utilization and Policy Reform in Dynamic EquilibriumEconomics

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Modern business cycle theory starts with the view that growth and fluctuations are not distinct phenomena to be studied using separate models. The first part of this project focuses on significant differences found in production data between the properties of output variation at the individual plant level and output variation at the aggregate level. This project constructs a general equilibrium model economy that is consistent with the features of long run growth observed in aggregate time series, but in which production takes place at individual plants that operate in a manner consistent with the micro evidence. An aggregate technology is derived that differs from the Cobb- Douglas production function assumed in standard models in which there are no distinctions between output fluctuations at the level of the plant, the firm or the aggregate. The project studies the properties of the aggregate fluctuations exhibited by the model and compares them with the cyclical properties of a standard real business cycle model. This research promises both methodological and substantive contributions to our understanding of economic growth. Methodologically it improves the microeconomic foundations of the basic model of economic growth. Substantively, it improves our understanding of the way different micro-level technologies influence the variability and the level of economic growth. This basic research eventually could prove significant for the scientific credibility and the accuracy of studies of the long- term consequences for economic growth of technologies for mitigating global environmental change. The second part of the project explores the welfare consequences of economic policy reforms in dynamic general equilibrium models. A "base policy" is derived by calibrating the model to features of actual policies. For the U.S., this means heavy reliance on capital and income taxation. The next step is to evaluate policy changes from this base regime. Examples include a shift from capital income taxation to labor or consumption taxation, a shift to heavier reliance on inflation taxation, and how the government responds in periods of high government consumption (such as wars) or periods of bad technology shocks such as an unexpected increase in energy costs. This research will sharpen our understanding of the welfare gains associated with policy reforms that involve moving from existing policies to optimal or plausible sub-optimal policies.