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The Return to Capital and the Business Cycle

Author

Listed:
  • Paul Gomme
  • B. Ravikumar
  • Peter Rupert

Abstract

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.

Suggested Citation

  • Paul Gomme & B. Ravikumar & Peter Rupert, 2006. "The Return to Capital and the Business Cycle," 2006 Meeting Papers 801, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:801
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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