Variable capital utilization and international business cycles

This paper develops a two-country international business-cycle model with variable capital utilization, using a standard depreciation-in-use technology. Variable capital utilization significantly reduces the required size of productivity shocks needed to replicate observed output volatility by 20-40%. Further, the model generates positive comovement across countries in wages, hours, and investment, while preserving empirically accurate predictions regarding the relative cross-country correlations of output and consumption and the countercyclical behavior of net exports. Finally, accounting for variable capital utilization reduces cross-country correlation of true productivity shocks relative to that of the standard Solow residual. (c) 2004 Published by Elsevier B.V.