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Stochastic Capital Depreciation and the Comovement of Hours and Productivity

  • Fischer, Andreas

    (Swiss National Bank and CEPR)

  • Michael J Dueker
  • Robert D Dittmar

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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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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  1. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
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  15. repec:adr:anecst:y:2000:i:58:p:05 is not listed on IDEAS
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  17. Gabriel DESGRANGES & Étienne WASMER, 2000. "Appariements sur le marché du logement," Annals of Economics and Statistics, GENES, issue 58.
  18. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
  19. Timothy Cogley, 1997. "Evaluating non-structural measures of the business cycle," Economic Review, Federal Reserve Bank of San Francisco, pages 3-21.
  20. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
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