Stochastic Capital Depreciation and the Comovement of Hours and Productivity

Andreas Fischer (), Michael Dueker and Robert D Dittmar

No 80, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: In this article, we demonstrate that a small degree of stochastic variation in the depreciation rate of capital can greatly reduce the comovement between hours worked and labor productivity in a neoclassical growth model. The depreciation rate is modeled as a Markov process, as opposed to a linear autoregressive process, to place a strict upper bound and to ensure that variation and not the level of the rate is driving the result. Markov switching implies nonlinear decision rules in the dynamic stochastic general equilibrium model (DSGE). Our contribution to solving DSGE models with Markov switching is to apply Judd's (1998) projection method to capture the nonlinearity in the decision rules. This approach allows for nonlinear decision rules in a richer set of models with many more state variables than can be solved with grid-based approximations. The results presented here suggest that Markov switching parameters offer a powerful extension to DSGE models.

Keywords: Marov switching; nonlinear decision rules; hours-productivity corr. (search for similar items in EconPapers)
JEL-codes: C63 E22 E32 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: Stochastic Capital Depreciation and the Co-movement of Hours and Productivity (2007)
Working Paper: Stochastic capital depreciation and the comovement of hours and productivity (2004)
Working Paper: Stochastic Capital Depreciation and the Comovement of Hours and Productivity (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2003:80

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