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Stochastic Capital Depreciation and the Comovement of Hours and Productivity

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Author Info
Dittmar, Robert
Dueker, Michael
Fischer, Andreas M

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Abstract

In this article, we demonstrate that a small degree of stochastic variation in the depreciation rate of capital can greatly reduce the comovement between hours worked and labour productivity in a neoclassical growth model. The depreciation rate is modeled as a Markov process to place a strict upper bound and to ensure that variation and not the level of the rate is driving the result. Markov switching implies non-linear decision rules in the dynamic stochastic general equilibrium model (DSGE). Our contribution to DSGE solution methodologies in the presence of Markov switching is to apply Judd's (1998) projection method to non-linear decision rules. This approach allows for non-linear decision rules in a richer set of models with many more state variables than can be solved with grid-based approximations. The results presented here suggest that Markov switching parameters offer a powerful extension to DSGE models.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3192.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3192

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Related research
Keywords: hours-productivity correlation; markov switching; non-linear decision rules;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
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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. 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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