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Stochastic Capital Depreciation and the Co-movement of Hours and Productivity

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Author Info
Michael Dueker (Federal Reserve Bank of St. Louis)
Andreas Fischer (Swiss National Bank)
Robert Dittmar (Federal Reserve Bank of St. Louis)

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Abstract

An unresolved question concerning stochastic depreciation shocks is whether they have to be unrealistically large to have any useful role in a dynamic general equilibrium model economy, as Ambler and Paquet (1994) first suggested. We first consider implied depreciation rates from sectoral data from the Bureau of Economic Analysis. These depreciation rates vary across time solely due to compositional changes within each sector. Hence, they tend to understate the range of fluctuation that would hold if the economic shelf life of capital varied endogenously as in Cooley et al. (1997). We find, however, that if depreciation rates follow a Markov switching process, a low variance of the depreciation rate is sufficient to allow a model economy to match the low correlation between hours worked and productivity observed in the data. White noise and autoregressive depreciation shocks, in contrast, require a counterfactually large variance in the depreciation rate to reduce the hours-productivity correlation. We also illustrate the level effects implied by nonlinear decision rules in simulations of dynamic general equilibrium models that include Markov switching parameters. Linear decision rules, in contrast, imply certainty equivalence and ignore the aversion that agents have to the skewed shock distributions that characterize Markov switching.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 6 (2007)
Issue (Month): 3 ()
Pages: 1181-1181
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Handle: RePEc:bep:mactop:v:6:y:2007:i:3:p:1181-1181

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Related research
Keywords: Markov switching nonlinear decision rules hours-productivity correlation

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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  16. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001. [Downloadable!]
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  17. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Inwon Jang & Richard Wong & Hyeon-seung Huh, 2008. "Optimal capital investment under uncertainty: An extension," Economics Bulletin, Economics Bulletin, vol. 5(4), pages 1-7. [Downloadable!]
  2. Paul Pichler, 2007. "On the accuracy of low-order projection methods," Economics Bulletin, Economics Bulletin, vol. 3(50), pages 1-8. [Downloadable!]
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