Time-to-build, monetary shocks, and aggregate fluctuations

The idea that the investment process takes time to produce finished capital goods was an integral part of Kydland and Prescott's early work on real business cycles, but this feature has been dropped in much recent work, mainly because it seemed to have little effect on macroeconomic dynamics. With a generalization of the “time-to-build” feature that incorporates multiple types of capital, however, a New Keynesian model can produce “u-shaped” responses in output, investment, and inflation to a monetary policy shock. Such responses are not found in many studies that assume no time-to-build friction. In addition, different specifications of the time-to-build structure result in substantially different response patterns for these aggregate variables.