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The Return to Capital and the Business Cycle

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Author Info
Paul Gomme (Concordia University)
B Ravikumar (University of Iowa)
Peter Rupert (University of California, Santa Barbara)

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Abstract

We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with stochastic taxes which captures nearly 80% of the relative volatility in the return to capital.

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Publisher Info
Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 08-07.

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Date of creation: 01 May 2007
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Handle: RePEc:cdl:ucsbec:08-07

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Related research
Keywords: return to capital; volatility; real business cycles;

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This paper has been announced in the following NEP Reports: This item is featured on the following reading lists:
  1. Canadian Macro Study Group
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.:
  1. Ellen McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report 191, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  2. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  3. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," Levine's Bibliography 506439000000000367, UCLA Department of Economics. [Downloadable!]
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  4. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycle," RCER Working Papers 268, University of Rochester - Center for Economic Research (RCER).
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  5. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December. [Downloadable!] (restricted)
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  6. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
  7. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland. [Downloadable!]
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  8. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September. [Downloadable!] (restricted)
  9. Greenwood, J. & Rogerson, R. & Wright, R., 1993. "Household Production in Real Business Cycle Thoery," RCER Working Papers 347, University of Rochester - Center for Economic Research (RCER).
  10. Rupert, Peter & Rogerson, Richard & Wright, Randall, 1995. "Estimating Substitution Elasticities in Household Production Models," Economic Theory, Springer, vol. 6(1), pages 179-93, June.
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  11. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  12. David Carey & Harry Tchilinguirian, 2000. "Average Effective Tax Rates on Capital, Labour and Consumption," OECD Economics Department Working Papers 258, OECD, Economics Department. [Downloadable!]
  13. Paul Gomme & Finn E. Kydland & Peter Rupert, 2001. "Home Production Meets Time to Build," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1115-1131, October. [Downloadable!] (restricted)
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  14. Poterba, James M., 1998. "The rate of return to corporate capital and factor shares: new estimates using revised national income accounts and capital stock data," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 211-246, June. [Downloadable!] (restricted)
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  15. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December. [Downloadable!] (restricted)
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  16. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March. [Downloadable!] (restricted)
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  17. Casey B. Mulligan, 2002. "Capital, Interest, and Aggregate Intertemporal Substitution," NBER Working Papers 9373, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  19. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April. [Downloadable!] (restricted)
Full references

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. Claudio Campanale & Gian Luca Clementi & Rui Castro, 2008. "Asset Pricing in a General Equilibrium Production Economy with Chew-Dekel Risk Preferences," Working Papers. Serie AD 2008-14, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  2. Morris A. Davis & Robert F. Martin, 2008. "Housing, home production, and the equity and value premium puzzles," International Finance Discussion Papers 931, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Claudio Campanale & Rui Castro & Gian Luca Clementi, . "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics. [Downloadable!] (restricted)
    Other versions:
  4. Enchuan Shao & Pedro Silos, 2008. "Firm entry and labor market dynamics," Working Paper 2008-17, Federal Reserve Bank of Atlanta. [Downloadable!]
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