Capital maintenance and depreciation over the business cycle

Abstract

This paper develops and estimates a stochastic general equilibrium model with capital maintenance, which affects endogenously the depreciation rate of capital. The estimate of maintenance series is found to track survey-based measures for Canada quite closely and to generate the procyclical pattern of maintenance observed in the data. We use it to infer the time profile of equipment capital depreciation in Canadian and US manufacturing. Contrary to existing estimates, the depreciation rate is estimated to be volatile and highly procyclical over the last 50 years in both countries. JEL classification: E22, E32, E37.

Endogenous capital depreciation and technology shocks

“…This result is in line with Greenwood et al (1988) and Albonico et al (2014) and means that the I-S shock reduces the marginal cost of capital utilization and therefore induces a higher u t . Also, the positive response of labor implies that the I-S shock reduces the cost of labor.…”

“…Speci…cally, when 12 < 0 maintenance is procyclical, whereas it becomes countercyclical when 12 > 0. In line with this result, Albonico et al (2014) empirically show that capital maintenance reacts procyclical following a TFP shock which can be interpreted as 12 < 0.…”

“…This essentially suggests that optimal maintenance and investment act as complementaries. Finally, Albonico et al (2014) suggest that total output, consumption, investment, next period's capital stock, the depreciation rate, and capital maintenance rise due to a TFP shock. On the other hand, following an I-S shock all of these variables rise, apart from capital maintenance.…”

“…The assumption that depreciation is a decreasing function of capital maintenance follows a number of studies i.e. McGrattan and Schmitz, 1999;Licandro and Puch, 2000;Collard and Kollintzas, 2000;Boucekkine and Ruiz-Tamarit, 2003;Boucekkine et al, 2009;Boucekkine et al, 2010;Albonico et al, 2014). 12 is the cross derivative of the depreciation function.…”

“…Until now there has been no reason to a priori assume whether this cross derivative is negative or positive, and whether the relative size of maintenance elasticity is greater or not than the Hicksian elasticity of complementarity. Albonico et al (2014) create the Canadian and US series for the depreciation rate, the maintenance and the capital utilization. Our theoretical results suggest that to match the observed responses of the macroeconomic aggregates the sign of the cross derivative should be negative and that the relative size of the Hicksian elasticity should be smaller than the maintenance elasticity of marginal depreciation.…”