Investment, Capacity Utilization, and the Real Business Cycle

This paper adopts Keynes' view that shocks to the marginal efficiency of investment are important for business fluctuations, but incorporates it in a neoclassical framework with endogenous capacity utilization. Increases in the efficiency of newly produced investment goods stimulate the formation of "new" capital and more intensive utilization and accelerated depreciation of "old" capital. Theoretical and quantitative analysis suggests that the shocks and transmission mechanism studied here may be important elements of business cycles.