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Multiple Equilibria and Indeterminacy in an Optimal Growth Model with Endogenous Capital Depreciation

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  • Gaowang Wang

    (Wuhan University)

  • Heng-fu Zou

    (Central University of Economics and Finance and Wuhan University)

Abstract

This paper extends an otherwise standard one-sector neoclassical growth model by postulating that the depreciation rate of physical capital depends on the agent's efforts on maintenance and repairs. Specifically, we introduce endogenous depreciation into the standard optimal growth model via two different mechanisms and examine the steady state and the dynamics of the model economy qualitatively and quantitatively. We find that with plausibel parameter values, multiple equilibria and indeterminacy can arise in simply modified optimal growth model.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 392.

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Length: 20 pages
Date of creation: 30 May 2010
Date of revision:
Handle: RePEc:cuf:wpaper:392

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Web page: http://cema.cufe.edu.cn/
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Related research

Keywords: Multiple Equilibria; Indeterminacy; Endogenous Depreciation;

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  1. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
  2. Spear, Stephen E., 1991. "Growth, externalities, and sunspots," Journal of Economic Theory, Elsevier, vol. 54(1), pages 215-223, June.
  3. Engelbert Dockner & Gustav Feichtinger, 1991. "On the optimality of limit cycles in dynamic economic systems," Journal of Economics, Springer, vol. 53(1), pages 31-50, February.
  4. Mukoyama, Toshihiko, 2008. "Endogenous depreciation, mismeasurement of aggregate capital, and the productivity slowdown," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 513-522, March.
  5. Rioja, Felix K., 2003. "Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2281-2304, September.
  6. Seiya Fujisaki & Kazuo Mino, 2010. "Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation," Economics Bulletin, AccessEcon, vol. 30(1), pages 808-816.
  7. George Evans & Seppo Honkapohja & Paul Romer, 1996. "Growth Cycles," NBER Working Papers 5659, National Bureau of Economic Research, Inc.
  8. Boldrin, Michele & Montrucchio, Luigi, 1986. "On the indeterminacy of capital accumulation paths," Journal of Economic Theory, Elsevier, vol. 40(1), pages 26-39, October.
  9. Howitt, P. & Mcfee, R.P., 1990. "Animal Spirits," UWO Department of Economics Working Papers 9005, University of Western Ontario, Department of Economics.
  10. William J. Baumol, 1971. "Optimal Depreciation Policy: Pricing the Products of Durable Assets," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 638-656, Autumn.
  11. Bitros, George C, 1976. "A Statistical Theory of Expenditures in Capital Maintenance and Repair," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 917-36, October.
  12. Gylfason, Thorvaldur & Zoega, Gylfi, 2007. "A golden rule of depreciation," Economics Letters, Elsevier, vol. 96(3), pages 357-362, September.
  13. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
  14. Leonardo Auernheimer, 1986. "Variable Depreciation and Some of Its Implications," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 99-113, February.
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