The name is absent

CAPACITY AND ASYMMETRIES IN MONETARY POLICY

optimal production level of the final firm (P_t is indeterminate. However, when some
input is supply-constrained, the final good price is larger than the input price.

As a result, the spillover term (Fy_t∕P_t) ⁶is larger than one. This term is going to
play a significant role in the model’s behavior, as will be stressed later.

2.2. Intermediate Good Firms. In this sector, each intermediate good is pro-
duced by a monopolistically competitive firm making use of capital and labor,
which are combined for production through a putty-clay technology. Intermediate
firms start period t with a predetermined level of capacity. Such a production plan
cannot be adapted to the needs of the firm within the period. Hence, investment
achieved during period t - 1 becomes productive at date t. Investment consists of
the design of a production plan by simultaneously choosing a quantity of capital
goods Kj_tt and employment capacity Nj_tt according to the following Cobb-Douglas
technology:

(2.10)                  ‰ = A_tK*_tN⅛^a

where 0 < a < 1. The term A_t is the aggregate productivity parameter, capturing
total factor productivity. The variable Nj_tt represents the maximum number of
available work-stations in the firm. Hence, the firm is at full capacity when all
these work-stations are operating full-time. As it is common in models featuring a
putty-clay technology, it is convenient to express investment decision as the choice
of both Kj_tt and a capital-labor ratio Xj_tt ≡ Kj_tt∕Nj_tt. Consequently, the expression
in (2.10) can be rewritten as

(2-11)                     YjU = A_tX^¹Kju

from where the technical productivity of the installed equipments can be deduced.
For the case of capital, it is given by A_tX°¹^~¹, whereas A_tX“_t represents that of
labor, so that this production function displays constant returns-to-scale in the
within-period labor. In particular, if the firm uses a quantity of labor L^d_t smaller
than Nj_tt, it then produces A_tX^tj_tL^d_t units of intermediate good. Once the id-
iosyncratic (demand) shock Vj_tt is revealed, the firm instantaneously adjusts its
labor demand L^d _t to cover the needs of its production plan, ly_t, that is,
^fel2∙ ^l∙'<=⅛ = ⅛ ^mi" {^y∙^t⅛∙ (¾) ∙ Ц ∙

In order to finance such productive activities, intermediate good firms must borrow
the necessary amount of money from a financial intermediary since cash earnings
do not arrive in time to finance the period wage bill. Specifically, firms rent labor
at a wage W_t which is paid with cash obtained from the financial intermediary at
an interest rate R¹j > 0. At the end of the period, the firm pays back the loan and
the interests: Π^z_tF-_t(l + R_t ).

After observing the aggregate shocks, but before knowing the idiosyncratic one,
input producing firms take their price decisions. Input prices are announced on
the basis of (rational) expectations, before the exact value of the demand for their
production is realized. This price-setting assumption has the advantage of giving

<<   4   5   6   7   8   9   10   >>

More intriguing information