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: A widely cited failing of real business cycle models is their inability to account for the cyclical patterns of financial variables. Perhaps less well known is the fact that the return to capital and equity are identical in the neoclassical growth model. This paper constructs a measure of the return to business capital for the U.S. The S&P 500 return is roughly six times more volatile than the return to business capital. Owing to the equivalence between the returns to capital and equity in the neoclassical growth model, papers in the real business cycle literature that successfully account for the time series variation in the S&P 500 return must fail to account for the time series properties of the return to capital. A fairly basic real business cycle model captures most of the observed variability in the return to capital. What is needed is a theory of the stock market that breaks the equivalence between the returns to equity and capital. Forthcoming, Review of Economic Dynamics

Keywords: return to capital; business cycles; asset returns (search for similar items in EconPapers)
JEL-codes: E01 E13 E32 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2008-04, Revised 2010-09-23
New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
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http://paulgomme.github.io/grr-2010-09-23-wp.pdf (application/pdf)

Related works:
Journal Article: The Return to Capital and the Business Cycle (2011)
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: https://EconPapers.repec.org/RePEc:crd:wpaper:08002

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