Stochastic Depreciation and the Business Cycle
The authors study a version of the neoclassical growth model in which shocks to both aggregate productivity and the depreciation of capital generate fluctuations around the steady-state growth path. Depreciation shocks induce an inverse comovement between average labor productivity and hours worked. When the model is calibrated to U.S. data, it generates a correlation between productivity and hours which is significantly closer to the observed value than that of standard real business cycle models. Furthermore, the addition of depreciation shocks does not cause a deterioration of the predictions of the model concerning other comovements. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Volume (Year): 35 (1994)
Issue (Month): 1 (February)
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