Vintage capital, technology, and monetary policy

Traditional dynamic, general equilibrium models generally assume a representative firm that can continuously adjust its capital stock in response to exogenous shocks to the economy. Empirical evidence, however, appears to contradict this assumption. Plant level expenditures occur infrequently and in bursts. This suggests that a vintage capital model might be a more adequate representation of the aggregate economy. The data further shows that the relative price of capital goods has consistently declined in the United States. This suggests that a significant portion of technological progress is embodied in newer, more efficient capital goods.;In the first essay, a vintage capital model with investment specific technological change is constructed. In addition, the economy is periodically hit by temporary changes in labor productivity and government spending. The model is linearized around its deterministic steady state and the transitional dynamics are analyzed. The main result is that even very temporary shocks create very persistent deviations from the model's steady state.;In the second essay, a monetary vintage capital model is constructed to analyze shocks to the supply of money. Earlier monetary models have shown that unanticipated increases in the money supply create excess liquidity in the financial sector, lowering interest rates and increasing economic activity. However, earlier work has been unable to generate persistence in the monetary transmission mechanism. This essay shows that a vintage framework can greatly enhance the persistence of a money shock.;The third essay is motivated by the fact that monetary authorities tend to switch periodically from high money growth regimes to low money growth regimes---possibly reflecting the values of the central banker. Secondly, expected inflation tends to show a certain degree of "sluggishness". That is, inflation expectations tend to have a low correlation with current money growth. A vintage capital model where consumers are unsure of the current monetary regime is constructed to analyze the effect of regime switches when the central bank has imperfect credibility. The main result is that while lowering money growth is good from a long run perspective, low credibility can create a lengthy recession in the short run.