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Stochastic Capital Depreciation and the Comovement of Hours and Productivity

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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 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 DSGE solution methodologies in the presence of Markov switching is to apply Judd's (1998) projection method to nonlinear 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 powerfull extension to DSGE models.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 02.01.

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Length: 32 pages
Date of creation: Jan 2002
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Handle: RePEc:szg:worpap:0201

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  1. Timothy Cogley, 1997. "Evaluating non-structural measures of the business cycle," Economic Review, Federal Reserve Bank of San Francisco, pages 3-21.
  2. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
  3. David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
  4. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  5. Ambler, Steve & Paquet, Alain, 1994. "Stochastic Depreciation and the Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 101-16, February.
  6. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
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  8. Burnside, A. Craig & Eichenbaum, Martin S. & Rebelo, Sergio T., 1996. "Sectoral Solow residuals," European Economic Review, Elsevier, vol. 40(3-5), pages 861-869, April.
  9. Collard, Fabrice & Kollintzas, Tryphon, 2000. "Maintenance, Utilization, and Depreciation along the Business Cycle," CEPR Discussion Papers 2477, C.E.P.R. Discussion Papers.
  10. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  11. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
  12. Fangxiong Gong, 1995. "Regime-switching monetary policy and real business cycle fluctuations," Research Paper 9528, Federal Reserve Bank of New York.
  13. Abadir, Karim & Talmain, Gabriel, 2001. "Depreciation Rates and Capital Stocks," Manchester School, University of Manchester, vol. 69(1), pages 42-51, January.
  14. Steve Ambler & Alain Paquet, 1992. "Stochastic Depreciation and the Business Cycle Puzzle," Cahiers de recherche CREFE / CREFE Working Papers 8, CREFE, Université du Québec à Montréal.
  15. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June.
  16. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  17. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Monetary shocks, agency costs, and business cycles," Working Paper 0011, Federal Reserve Bank of Cleveland.
  18. Ellen R. McGrattan & James A. Schmitz, Jr., 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-13.
  19. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February.
  20. Omar LICANDRO & Luis A. PUCH, 2000. "Capital Utilization, Maintenance Costs and the Business Cycle," Annales d'Economie et de Statistique, ENSAE, issue 58, pages 143-164.
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Citations

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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. 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.
  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. Ludmila Fadejeva & Aleksejs Melihovs, 2010. "Measuring Total Factor Productivity and Variable Factor Utilization," Eastern European Economics, M.E. Sharpe, Inc., vol. 48(5), pages 63-101, September.
  5. repec:ebl:ecbull:v:5:y:2008:i:4:p:1-7 is not listed on IDEAS
  6. 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.
  7. Inwon Jang & Hyeon-seung Huh & Richard Wong, 2008. "Optimal capital investment under uncertainty: An extension," Economics Bulletin, AccessEcon, vol. 5(4), pages 1-7.
  8. 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.
  9. 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.
  10. 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.
  11. Paul Pichler, 2007. "On the accuracy of low-order projection methods," Economics Bulletin, AccessEcon, vol. 3(50), pages 1-8.
  12. 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.
  13. repec:ebl:ecbull:v:3:y:2007:i:50:p:1-8 is not listed on IDEAS
  14. 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.
  15. 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.

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