The Return to Capital and the Business Cycle

Paul Gomme (), B Ravikumar () and Peter Rupert ()

No 8002, Working Papers from Concordia University, Department of Economics

Abstract: We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. Specifically, we construct a quarterly time series of the after-tax return to business capital. The business cycle properties of this return differs considerably from those of the S&P 500 returns. First, its volatility is considerably smaller than that of S\&P 500 returns. Second, our measured return is procyclical and leads output by one quarter; S&P 500 returns are countercyclical and lead the cycle by four quarters. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output), and does well in capturing the lead-lag pattern. We consider several departures from the benchmark model; the model with stochastic taxes captures nearly 85% of the relative volatility in the return to capital and the model with high risk aversion captures 80% of the relative volatility. We then include capital gains in our measurement and use a model with investment specific technological change to address the higher volatility in the return to capital. This model accounts for more than 80% of the return volatility, and essentially all of the relative volatility.

Keywords: return to capital; business cycles; asset returns (search for similar items in EconPapers)
JEL-codes: E01 E32 E13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2008-04
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http://alcor.concordia.ca/~pgomme/grr-2008-04-07.pdf (application/pdf)

Related works:
Working Paper: The Return to Capital and the Business Cycle (2007)
Working Paper: The return to capital and the business cycle (2006)
Working Paper: The Return to Capital and the Business Cycle (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:crd:wpaper:08002

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