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Maintenance and investment: complements or substitutes? A reappraisal

Author

Listed:
  • BOUCEKKINE, Raouf
  • FABBRI, Giorgio
  • GOZZI, Fausto

Abstract

A benchmark AK optimal growth model with maintenance expenditures and endogenous utilization of capital is considered within an explicit vintage capital framework. Scrapping is endogenous, and the model allows for a clean distinction between age and usage dependent capital depreciation and obsolescence. It is also shown that in this set-up past investment profile completely determines the size of current maintenance expenditures. Among other findings, a closed-form solution to optimal dynamics is provided taking advantage of very recent development in optimal control of infinite dimensional systems. More importantly, and in contrast to the pre-existing literature, we study investment and maintenance co-movements without any postulated ad hoc depreciation function. In particular using impulse response experiments, we find that optimal investment and maintenance do move together in the short-run in response to neutral technological shocks, which seems to be more consistent with the data.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • BOUCEKKINE, Raouf & FABBRI, Giorgio & GOZZI, Fausto, 2010. "Maintenance and investment: complements or substitutes? A reappraisal," LIDAM Reprints CORE 2333, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2333
    DOI: 10.1016/j.jedc.2010.06.007
    Note: In : Journal of Economic Dynamics & Control, 34(12), 2420-2439, 2010
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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