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The Return to Capital and the Business Cycle

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  • Gomme, Paul
  • Ravikumar, B
  • Rupert, Peter

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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Bibliographic 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 qt8d5824r7.

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Date of creation: 01 May 2007
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Handle: RePEc:cdl:ucsbec:qt8d5824r7

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

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References

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  1. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(6), pages 1166-87, December.
  2. Gomme, Paul & Klein, Paul, 2011. "Second-order approximation of dynamic models without the use of tensors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 35(4), pages 604-615, April.
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  5. Hercowitz, Z., 1992. "Macroeconomic Implication of Investment-Specific Technological Change," Papers, Tel Aviv - the Sackler Institute of Economic Studies 13-92, Tel Aviv - the Sackler Institute of Economic Studies.
  6. 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, Elsevier, vol. 34(3), pages 297-323, December.
  7. James M. Poterba, 1999. "The Rate of Return to Corporate Capital and Factor Shares: New EstimatesUsing Revised National Income Accounts and Capital Stock Data," NBER Working Papers 6263, National Bureau of Economic Research, Inc.
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  11. Ellen McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report, Federal Reserve Bank of Minneapolis 191, Federal Reserve Bank of Minneapolis.
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  17. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  18. Anton Braun, R., 1994. "Tax disturbances and real economic activity in the postwar United States," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 441-462, June.
  19. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(2), pages 460-497, March.
  20. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 573-601, June.
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