Stochastic Capital Depreciation and the Comovement of Hours and Productivity

26 Pages Posted: 26 Feb 2002

See all articles by Robert Dittmar

Robert Dittmar

Citigroup, Inc. - CitiMortgage

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Andreas M. Fischer

Swiss National Bank; Centre for Economic Policy Research (CEPR)

Date Written: February 2002

Abstract

An unresolved question concerning stochastic depreciation shocks is whether they have to be unrealistically large to have any useful role in a dynamic general equilibrium model economy, as Ambler and Paquet (1994) first suggested. We first consider implied depreciation rates from sectoral data from the Bureau of Economic Analysis. These depreciation rates vary across time solely due to compositional changes within each sector. Hence, they tend to understate the range of fluctuation that would hold if the economic shelf life of capital varied endogenously as in Cooley, Greenwood and Yorukoglu (1997). We find, however, that if depreciation rates follow a Markov switching process, a low variance of the depreciation rate can generate the low correlation between hours worked and productivity in a simple model economy. White noise and autoregressive depreciation shocks, in contrast, require a counterfactually large variance in the depreciation rate to reduce the hours-productivity correlation. We also illustrate the level effects implied by nonlinear decision rules in simulations of dynamic general equilibrium models that include Markov switching parameters. Linear decision rules, in contrast, imply certainty equivalence and ignore the aversion that agents have to the skewed shock distributions that characterize Markov switching.

Keywords: Markov Switching, Nonlinear Decision Rules, Hours-Productivity Correlation

JEL Classification: C63, E22, E32

Suggested Citation

Dittmar, Robert D. and Dueker, Michael and Fischer, Andreas M., Stochastic Capital Depreciation and the Comovement of Hours and Productivity (February 2002). CEPR Discussion Paper No. 3192, Available at SSRN: https://ssrn.com/abstract=301876

Robert D. Dittmar (Contact Author)

Citigroup, Inc. - CitiMortgage ( email )

St. Louis, MO
United States

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Andreas M. Fischer

Swiss National Bank ( email )

Borsenstrasse 15
CH-8022 Zurich
Switzerland
+41 1 631 3294 (Phone)
+41 1 631 3901 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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