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Stochastic Capital Depreciation and the Comovement of Hours and Productivity

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Author Info
Fischer, Andreas (Swiss National Bank and CEPR)
Michael J Dueker
Robert D Dittmar

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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 labor productivity in a neoclassical growth model. The depreciation rate is modeled as a Markov process, as opposed to a linear autoregressive 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 nonlinear decision rules in the dynamic stochastic general equilibrium model (DSGE). Our contribution to solving DSGE models with Markov switching is to apply Judd's (1998) projection method to capture the nonlinearity in the decision rules. This approach allows for nonlinear 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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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 80.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:80

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Related research
Keywords: Marov switching; nonlinear decision rules; hours-productivity corr.;

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Find related papers by JEL classification:
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
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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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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