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Endogenous vs Exogenously Driven Fluctuations in Vintage Capital Models

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  • Boucekkine, Raouf

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • del Rio, Fernando

    (CEPREMAP, France)

  • Licandro, Omar

    (FEDEA, Spain)

Abstract

In this paper, we present a simple vintage capital growth model in which both exogenous and endogenous fluctuations sources are present. Indeed, it can be seen as a particular case of Caballero and Hammour (1996)'s creative destruction model, with advantage that analytical characterization of the short run and asymptotic dynamics is partially allowed. In particular, we show that job creation follows a delayed-differential equation with periodic coefficients. The delay is equal to the optimal age of capital goods, and can be taken as a measure of the periodicity of the endogenous replacement echoes inherent to vintage models. The period of the coefficients is equal to the period of an exogenous profitability cycle. We mathematically show that job creation is asymptotically periodic, with the same period as the profitability cycle. Furthermore using an explicit numerical method, we find that replacement echoes generally dominate the short run dynamics. Finally, we find that the combination of the two fluctuations sources favors the appearance of asymmetries in job creation and job destruction patterns.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1999007.

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Length: 25
Date of creation: 01 Mar 1999
Date of revision:
Handle: RePEc:ctl:louvir:1999007

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Keywords: Endogenous fluctuations; Vintage capital models; Replacement echoes; Differential-difference equations; Floquet representations;

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References

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  1. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues 91-5, Federal Reserve Bank of Chicago.
  2. Ricardo J. Caballero & Mohamad L. Hammour, 1994. "On the Timing and Efficiency of Creative Destruction," NBER Working Papers 4768, National Bureau of Economic Research, Inc.
  3. Boucekkine, Raouf, et al, 1998. " Creative Destruction, Investment Volatility, and the Average Age of Capital," Journal of Economic Growth, Springer, vol. 3(4), pages 361-84, December.
  4. Jess Benhabib & Aldo Rustichini, 1990. "Vintage Capital, Investment and Growth," Discussion Papers 886, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Boucekkine, Raouf & Licandro, Omar & Paul, Christopher, 1997. "Differential-difference equations in economics: On the numerical solution of vintage capital growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 347-362.
  6. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932.
  7. Wen, Yi, 1998. "Investment cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 1139-1165, May.
  8. Cogley, Timothy & Nason, James M, 1995. "Output Dynamics in Real-Business-Cycle Models," American Economic Review, American Economic Association, vol. 85(3), pages 492-511, June.
  9. Cooley, T.F. & Greenwood, J. & Yorukoglu, M., 1995. "The Replacement Problem," UWO Department of Economics Working Papers 9508, University of Western Ontario, Department of Economics.
  10. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  11. van Hilten, Onno, 1991. "The optimal lifetime of capital equipment," Journal of Economic Theory, Elsevier, vol. 55(2), pages 449-454, December.
  12. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  13. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
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