Alain Paquet

Stochastic Depreciation and the Business Cycle

The authors study a version of the neoclassical growth model in which shocks to both aggregate productivity and the depreciation of capital generate fluctuations around the steady-state growth path. Depreciation shocks induce an inverse comovement between average labor productivity and hours worked. When the model is calibrated to U.S. data, it generates a correlation between productivity and hours which is significantly closer to the observed value than that of standard real business cycle models. Furthermore, the addition of depreciation shocks does not cause a deterioration of the predictions of the model concerning other comovements. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Issues on the measurement of the Solow residual and the testing of its exogeneity: Evidence for Canada☆

Abstract This paper examines the impact of adjusting the Solow residual for variable capacity utilization on the empirical assessment of market structure and exogeneity of productivity shocks. Making use of an innovative measure of capacity utilization available in Canada reveals that its aggregate market structure is well described by constant returns to scale and perfect competition in contrast to most studies which do not make this adjustment. Furthermore, when the capital stock is adjusted for variations in utilization rates, Canadian productivity shocks are exogenous to real and monetary variables.

Inflationary expectations and rationality

Abstract Evidence of a cointegrating vector of (1, –1) between actual and expected inflation rates supports the rational expectations hypothesis. The paper also illustrates the caution one must exercise when applying modern time-series econometrics techniques in finite samples.