UC San Diego

This dissertation consists of four essays on the relations among investment-specific technological change, factor- hoarding and business cycles. In the first chapter, I 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. Chapter two revisits the structural VAR model which shows that investment- specific technology shocks (I-shocks) account for a significant fraction of the business cycles. I show that the I-shocks estimated from a baseline model using a full sample are significantly predicted by oil shocks and Federal funds rates. When oil shocks and monetary policy are explicitly taken into account in the structural VAR model, the extent to which I-shocks account for business cycle variability declines from 55% to 16%. Furthermore, the estimated I-shocks using a split sample seem to trace the cyclical component of labor input poorly. The contemporaneous correlation between the actual labor input and the labor input due to I-shocks are -0.34 in the second subsample. Chapter three raises warning flags about the current use of the real price of equipment as the driving process for investment-specific technology in the Real-Business-Cycle (RBC) model. Using a structural VAR approach, this chapter finds that a significant fraction of the real price of equipment is accounted for by other shocks besides investment-specific technology shocks (I- shocks). This finding indicates that the current RBC models which use the real price of equipment as the driving process of investment-specific technology might overstate the contribution of I-shocks to economic fluctuations. Finally, chapter four shows that when the workweek of capital and efforts are allowed to vary, the employment lag itself cannot generate a hump-shaped response of output to a monetary shock. The reason for this is that despite the fact that the size of employment is predetermined, firms can rely on other low adjustment cost margins such as the workweek of capital and efforts to meet the increase in demand due to a positive monetary shock