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Capital Stock Depreciation, Tax Rules, and Composition of Aggregate Investment

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  • Daniel Levy

    (Bar-Ilan University)

Abstract

I estimate time varying aggregate capital stock depreciation rates for the post-war U.S. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especially during the last 10–15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument.

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File URL: http://128.118.178.162/eps/othr/papers/0505/0505007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Others with number 0505007.

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Date of creation: 15 May 2005
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Handle: RePEc:wpa:wuwpot:0505007

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Related research

Keywords: Time Varying Depreciation Rate; Capital Stock; Consumer Durable Goods; Producer Durable Goods; Business Structures; Technological Progress;

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  1. Levy, Daniel & Chen, Haiwei, 1994. "Estimates of the Aggregate Quarterly Capital Stock for the Post-war U.S. Economy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(3), pages 317-49, September.
  2. Stephen D. Oliner, 1989. "The formation of private business capital: trends, recent developments, and measurement issues," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 771-783.
  3. Hulten, Charles R. & Wykoff, Frank C., 1981. "The estimation of economic depreciation using vintage asset prices : An application of the Box-Cox power transformation," Journal of Econometrics, Elsevier, vol. 15(3), pages 367-396, April.
  4. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
  5. Harcourt,G. C., 1972. "Some Cambridge Controversies in the Theory of Capital," Cambridge Books, Cambridge University Press, number 9780521096720.
  6. Taubman, Paul & Rasche, R, 1971. "Subsidies, Economic Lives, and Complete Resource Misallocation," American Economic Review, American Economic Association, vol. 61(5), pages 938-45, December.
  7. Eisner, Robert, 1972. "Components of Capital Expenditures: Replacement and Modernization Versus Expansion," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 297-305, August.
  8. Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, vol. 42(3), pages 393-423, May.
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Cited by:
  1. Erdal Karagol, 2002. "The Causality Analysis of External Debt Service and GNP : The Case of Turkey," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 39-64.

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