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Stochastic Capital Depreciation and the Comovement of Hours and Productivity

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  • Fischer, Andreas

    (Swiss National Bank and CEPR)

  • Michael J Dueker
  • Robert D Dittmar

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

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Cited by:
  1. Richard Harrison & George Kapetanios & Alasdair Scott & Jana Eklund, 2008. "Breaks in DSGE models," 2008 Meeting Papers 657, Society for Economic Dynamics.
  2. repec:ebl:ecbull:v:5:y:2008:i:4:p:1-7 is not listed on IDEAS
  3. Belaygorod, Anatoliy & Dueker, Michael, 2009. "Indeterminacy, change points and the price puzzle in an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 624-648, March.
  4. Fransesco Furlanetto & Martin Seneca, 2010. "New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations," Economics wp48, Department of Economics, Central bank of Iceland.
  5. Poudel, Diwakar & Sandal, Leif K. & Kvamsdal, Sturla F. & Steinshamn, Stein I., 2011. "Fisheries Management under Irreversible Investment: Does Stochasticity Matter?," Discussion Papers 2011/20, Department of Business and Management Science, Norwegian School of Economics.
  6. Paul Pichler, 2007. "On the accuracy of low-order projection methods," Economics Bulletin, AccessEcon, vol. 3(50), pages 1-8.
  7. Anatoliy Belaygorod & Michael J. Dueker, 2007. "The price puzzle and indeterminacy in an estimated DSGE model," Working Papers 2006-025, Federal Reserve Bank of St. Louis.
  8. Bitros, George C., 2009. "The Theorem of Proportionality in Mainstream Capital Theory: An Assessment of its Conceptual Foundations," MPRA Paper 17436, University Library of Munich, Germany.
  9. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
  10. George Bitros, 2010. "The theorem of proportionality in contemporary capital theory: An assessment of its conceptual foundations," The Review of Austrian Economics, Springer, vol. 23(4), pages 367-401, December.
  11. repec:ebl:ecbull:v:3:y:2007:i:50:p:1-8 is not listed on IDEAS
  12. Jasmina Hasanhodzic & Laurence J. Kotlikoff, 2013. "Generational Risk–Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks," BYU Macroeconomics and Computational Laboratory Working Paper Series 2013-01, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  13. Inwon Jang & Hyeon-seung Huh & Richard Wong, 2008. "Optimal capital investment under uncertainty: An extension," Economics Bulletin, AccessEcon, vol. 5(4), pages 1-7.
  14. Ludmila Fadejeva & Aleksejs Melihovs, 2009. "Measuring Total Factor Productivity and Variable Factor Utilisation: Sector Approach, The Case of Latvia," Working Papers 2009/03, Latvijas Banka.
  15. Pedro P. Alvarez-Lois, 2005. "Production Inflexibilities and the Cost Channel of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 170-193, January.

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