Time to plan and aggregate fluctuations

Abstract

This article investigates the business cycle implications of the planning phase of business investment projects. Time to plan is built into a Kydland-Prescott time-to-build model, which assumes that investment projects take four periods to complete. In the Kydland-Prescott time-to-build model, resources for these projects flow uniformly across the four periods; in the time-to-plan model, few resources are used in the first period. The investigation determines that incorporating time to plan in this way improves the model's ability to account for three key features of U.S. business cycles: their persistence, or the fact that when output growth is above (or below) average, it tends to remain high (or low) for a few quarters; the fact that productivity leads hours worked over the business cycle; and the fact that business investment in structures and business investment in equipment lag output over the cycle.