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The Return to Capital and the Business Cycle

  • Paul Gomme
  • B. Ravikumar
  • Peter Rupert

Real business cycle models have difficulty replicating the volatility of S&P 500 returns. This fact should not be surprising since the RBC theory suggests a measurement of the return of aggregate capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. Our benchmark model captures almost 40% of the volatility in the return to capital relative to the volatility of output.

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 801.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:801
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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