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

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  • Dueker Michael

    () (Federal Reserve Bank of St. Louis)

  • Fischer Andreas

    () (Swiss National Bank)

  • Dittmar Robert

    () (Federal Reserve Bank of St. Louis)

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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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2007)
Issue (Month): 3 (January)
Pages: 1-24

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2007:i:3:n:6

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Citations

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Cited by:
  1. Francesco Furlanetto & Martin Seneca, 2011. "New perspectives on depreciation shocks as a source of business cycle fluctuations," Working Paper 2011/02, Norges Bank.
  2. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations," MPRA Paper 17436, University Library of Munich, Germany.
  3. repec:ebl:ecbull:v:3:y:2007:i:50:p:1-8 is not listed on IDEAS
  4. Inwon Jang & Hyeon-seung Huh & Richard Wong, 2008. "Optimal capital investment under uncertainty: An extension," Economics Bulletin, AccessEcon, vol. 5(4), pages 1-7.
  5. Ludmila Fadejeva & Aleksejs Melihovs, 2010. "Measuring Total Factor Productivity and Variable Factor Utilization," Eastern European Economics, M.E. Sharpe, Inc., vol. 48(5), pages 63-101, September.
  6. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
  7. Richard Harrison & George Kapetanios & Alasdair Scott & Jana Eklund, 2008. "Breaks in DSGE models," 2008 Meeting Papers 657, Society for Economic Dynamics.
  8. Anatoliy Belaygorod & Michael J. Dueker, 2007. "The price puzzle and indeterminacy in an estimated DSGE model," Working Papers 2006-025, Federal Reserve Bank of St. Louis.
  9. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer, vol. 23(4), pages 367-401, December.
  10. repec:ebl:ecbull:v:5:y:2008:i:4:p:1-7 is not listed on IDEAS
  11. Paul Pichler, 2007. "On the accuracy of low-order projection methods," Economics Bulletin, AccessEcon, vol. 3(50), pages 1-8.
  12. Pedro P. Alvarez-Lois, 2005. "Production Inflexibilities and the Cost Channel of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 170-193, January.
  13. Poudel, Diwakar & Sandal, Leif K. & Kvamsdal, Sturla F. & Steinshamn, Stein I., 2011. "Fisheries Management under Irreversible Investment: Does Stochasticity Matter?," Discussion Papers 2011/20, Department of Finance and Management Science, Norwegian School of Economics.
  14. Belaygorod, Anatoliy & Dueker, Michael, 2009. "Indeterminacy, change points and the price puzzle in an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 624-648, March.

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