Maintenance expenditures and indeterminacy under increasing returns to scale

Jang-Ting Guo and Kevin Lansing

No 2005-10, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: This paper develops a one-sector real business cycle model in which competitive firms allocate resources for the production of goods, investment in new capital, and maintenance of existing capital. Firms also choose the utilization rate of existing capital. A higher utilization rate leads to faster capital depreciation, while an increase in maintenance activity has the opposite effect. We show that as the equilibrium ratio of maintenance expenditures to GDP rises, the required degree of increasing returns for local indeterminacy declines over a wide range of parameter combinations. When the model is calibrated to match empirical evidence on the relative size of maintenance and repair activity, we find that local indeterminacy (and belief-driven fluctuations) can occur with a mild and empirically-plausible degree of increasing returns?around 1.08.

Keywords: Business cycles; Competition (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (5)

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Journal Article: Maintenance expenditures and indeterminacy under increasing returns to scale (2007)
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