Aggregate Capital Stock Research Articles

Productivity Versus Welfare: Or, GDP Versus Weitzman's NDP

How should productivity and welfare be measured when the composition of the capital stock is shifting towards assets with shorter lives? What sort of adjustment, if any, should be made for depreciation? While GDP is still appropriate as a measure of output, I argue that Weitzman's NDP (WNDP) - nominal net domestic product deflated by the price index for consumption - is the appropriate measure of welfare. The rate at which the WNDP frontier is shifting out over time is analogous to the rate of growth of aggregate total factor productivity (TFP). Like the latter, it can be decomposed into the contributions made by TFP growth in individual industries, though with a different pattern of weights. The argument is illustrated by the experience of the United States in the 1990s. Here net investment increased more rapidly than gross investment and both grew faster than GDP, while the aggregate depreciation rate rose. Nevertheless the aggregate capital stock grew more slowly than GDP, and depreciation as a proportion of GDP was flat. Both official NDP and WNDP have been growing a little more slowly than GDP. But the acceleration of WNDP post 1995 was as great as that of GDP. Also, the rise in the growth rate of the WNDP frontier was equal to that of aggregate TFP.

Ramsey Equilibrium in a Two-Sector Model with Heterogeneous Households

We prove an existence theorem for a stationary perfect foresight equilibrium under borrowing constraints in a two-sector model with infinitely lived heterogeneous agents. The most patient agent holds all the capital in this solution. We also show that if the capital goods sector is capital intensive and capital income is increasing in the aggregate capital stock, then the aggregate capital stock eventually is monotonic and converges to the steady state stock. If the consumption goods sector is more capital intensive and capital income is increasing in aggregate capital we prove convergence to the steady state under more restrictive conditions. Periodic equilibria are shown to exist under weaker hypotheses. Journal of Economic Literature Classification Numbers: D52, D90, E13.

PRIVATIZATION TRANSFERS AND CREDIT MARKET FRICTIONS

This paper examines an economy in which output is produced by state-owned enterprises and private firms. Private-capital formation requires intermediation that is subject to a credit market friction. In this environment, I look at the effects of a privatization policy that transfers state-owned capital to the private sector. Multiple steady-state equilibria are possible. When these arise, the low-wage equilibrium features a relatively inefficient financial system and privatization transfers help to increase the aggregate capital stock by reducing the severity of the credit market frictions. On the other hand, privatization transfers may have adverse effects when the economy is at the high-wage equilibrium. Analysis of the dynamic characteristics of the model reveals that development trap phenomenon and endogenous fluctuations can be observed.

Wealth Inequality and Altruistic Bequests

This paper examines the role of bequests and inter vivos gifts in the U.S. economy, considering their importance in determining (i) the economy’s aggregate capital stock, (ii) the distribution of private net worth, and (iii) public policy outcomes and options. It focuses on several recent calibrated simulations.(This abstract was borrowed from another version of this item.)

Investor Protection, Optimal Incentives, and Economic Growth

Recent empirical evidence has suggested a positive association between various measures of investor protection and financial markets development, and between financial markets development and economic growth. We introduce investor protection in a simple extension of the two-period overlapping generations model of capital accumulation and study how it affects economic growth. Investor protection is positively related to risk-sharing. As is standard in models of investment with risk-averse agents, better protection (better risk sharing) results in a larger demand for capital. This is the demand effect. A second effect, which we call the supply effect, follows from general equilibrium restrictions. For a given aggregate capital stock, better protection (i.e., a higher demand schedule) implies a higher interest rate. The aggregate resource constraint then implies lower income for the entrepreneurs (the younger cohort). As a result, current savings and the supply of capital in the following period decrease. It turns out that the strength of the supply effect is greater, the tighter the restrictions on capital flows. Therefore our model predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions. We find that the data provides some support for this prediction.

Wealth, Inequality, and Altruistic Bequests

This paper examines the role of bequests and inter vivos gifts in the U.S. economy, considering their importance in determining (i) the economy's aggregate capital stock, (ii) the distribution of private net worth, and (iii) public policy outcomes and options. It focuses on several recent calibrated simulations.

The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding Stocks

With fixed costs of participating in the stock market, consumers with high income will participate in the stock market, but consumers with lower income will not participate. If a fully funded defined-contribution Social Security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita, consumers who save but do not participate in the stock market will increase their consumption, thereby reducing saving and capital accumulation. Calibration of a general-equilibrium model indicates that this policy could reduce the aggregate capital stock substantially, by about 50 cents per capita. (JEL H55)

Investment and financial restraints: theory and evidence

This paper examines investment decisions in an economy with two financial markets: an official market, which is subject to rationing due to an interest rate ceiling, and an unrestricted market, with a higher interest rate. In this context, the long-run equilibrium aggregate capital stock is unambiguously higher than in the absence of the interest rate ceiling, even though its relationship with the ceiling is non-monotonic. Empirical results using aggregate panel data from 52 developing countries for the period 1974–1988 provide support for the model, particularly in economies that have some access to international capital markets. Copyright © 2000 John Wiley & Sons, Ltd.

The Voracity Effect

We analyze an economy that lacks a strong legal-political institutional infrastructure and is populated by multiple powerful groups. Powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock. In equilibrium, this leads to slow economic growth and a “voracity effect,” by which a shock, such as a terms of trade windfall, perversely generates a more-than-proportionate increase in fiscal redistribution and reduces growth. We also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks. (JEL F43, O10, O23, O40)

Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia

Different levels of corporate leverage are used in this paper to help explain the wide range of post-crisis output adjustment across East Asia. In the model developed here, highly leveraged firms facing a cutoff of capital inflows are threatened by bankruptcy. These firms respond by eliminating investment and selling their capital goods-at a discount-to try to stay afloat. Lower investment and wasteful capital sales shrink the aggregate capital stock, trigger deflationary pressures, and contract overall output. The available data are broadly consistent with the assumptions and predictions of the model.

THE SOLOW RESIDUAL FOR AUSTRALIA: TECHNOLOGY SHOCKS OR FACTOR UTILIZATION?

I. INTRODUCTION In macroeconomics a standard way of measuring technology shocks is to use the Solow residual, Solow [1957]. However a growing body of evidence suggests the Solow residual is at best a noisy measure of technology shocks. A number of hypotheses have been advanced as to why this might be the case. These include: the existence of imperfect competition and increasing returns to scale (Hall [1988; 1990]), spillover externalities (Caballero and Lyons [1992]) and variations in factor utilization rates (Basu [1995], Burnside [1996], Burnside et at. [1993; 1995a,b], Burnside and Eichenbaum [1994] and Finn [1995]). Recent work by Basu [1995] and Burnside et al. [1995a], using data for United States (U.S.) manufacturing industries, suggests that changes in capital utilization are the most likely cause of the mis-measurement of technology by the Solow residual. This paper presents an econometric analysis of the behavior of the Solow residual for the Australian economy.(1) The preliminary analysis examines whether the Solow residual for Australia can be characterized as a strictly exogenous variable. Following Evans [1992], I test whether the Solow residual is Grangercaused by a number of other macroeconomic variables including: foreign prices and production, government spending, interest rates and a monetary aggregate. Fluctuations in such variables are frequently proposed as sources of business cycles in small open economies. Consistent with results obtained for the U.S. by Evans, I find that the Solow residual for Australia is not a strictly exogenous variable. However while Evans finds money supply growth and government spending Granger-cause the U.S. Solow residual, neither of these variables is a significant predictor in the Australian case. For Australia, the terms of trade and a measure of the term spread have the strongest predictive content for the Solow residual. What these results indicate is that the standard measure of the Solow residual for Australia is affected by shocks other than pure technological innovations. In an attempt to quantify the contribution of other (non-technology) shocks to fluctuations in the Solow residual for Australia, I employ the Structural Vector Autoregression (SVAR) methodology developed by Shapiro and Watson [1988], Blanchard and Quah [1989] and Cochrane [1994]. It is assumed that the measured Solow residual is affected by two types of mutually uncorrelated shocks. One of these has a permanent effect on the level of the Solow residual and the other has only a temporary effect. To identify these two disturbances I use information from a second variable, capacity utilization, where this choice is influenced by the recent work of Burnside and Eichenbaum [1994] and Burnside et al. [1995b]. Neither of the two shocks affecting the Solow residual has a permanent effect on the level of capacity utilization. The shock which has a permanent effect on the Solow residual is identified with a true technology disturbance, while the other shock is assumed to reflect aggregate demand disturbances. The remainder of this paper is organized as follows. In section II a measure of the Solow residual for Australia is constructed and its predictability examined. Section III contains a discussion of the SVAR model used to analyze the Solow residual and capacity utilization. The empirical results from this model are presented in section IV. Section V considers the robustness of the results and section VI concludes. II. PROPERTIES OF THE SOLOW RESIDUAL In macroeconomics a standard means of computing the (logarithm of the) Solow residual [a.sub.1] is to use the following equation, (1) [a.sub.t] = [y.sub.t] - [S.sub.N] [n.sub.t] - (1 - [S.sub.N])[k.sub.t] where y is the log of aggregate output, n is the log of total hours worked, k is the log of the aggregate capital stock and [S.sub.N] is labour's share of national income (assumed to be constant). …

Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia

Different levels of corporate leverage are used in this paper to help explain the wide range of post-crisis output adjustment across East Asia. In the model developed here, highly leveraged firms facing a cutoff of capital inflows are threatened by bankruptcy. These firms respond by eliminating investment and selling their capital goods-at a discount-to try to stay afloat. Lower investment and wasteful capital sales shrink the aggregate capital stock, trigger deflationary pressures, and contract overall output. The available data are broadly consistent with the assumptions and predictions of the model.

Nominal Wage Rigidities and the Propagation of Monetary Disturbances

Recent research has challenged the ability of sticky price general equilibrium models to generate a contract multiplier, i.e., an effect of a monetary innovation on output that extends beyond the contract interval. We show that a simple dynamic general equilbrium model that includes Taylor-style (1980) wage and price contracts can account for a substantial contract multiplier under various assumptions about the structure of the capital market. Most interestingly, our results do not rely on a high intertemporal labor supply elasticity or elastic supply of capital: our preference specification is standard (logarithmic), and we can account for a strong contract multiplier even when the aggregate stock of capital is fixed. Finally, our analysis highlights the importance of the income elasticity of money demand in accounting for output persistence.

Nominal Wage Rigidities and the Propagation of Monetary Disturbances

Recent research has challenged the ability of sticky price general equilibrium models to generate a contract multiplier, i.e., an effect of a monetary innovation on output that extends beyond the contract interval. We show that a simple dynamic general equilbrium model that includes "Taylor-style" (1980) wage and price contracts can account for a substantial contract multiplier under various assumptions about the structure of the capital market. Most interestingly, our results do not rely on a high intertemporal labor supply elasticity or elastic supply of capital: our preference specification is standard (logarithmic), and we can account for a strong contract multiplier even when the aggregate stock of capital is fixed. Finally, our analysis highlights the importance of the income elasticity of money demand in accounting for output persistence.

Reflections on the meaning of sustainable development in the water sector

Economic interpretations of sustainable development have concentrated on the need to maintain the aggregate capital stock intact, so as to ensure a constant stream of welfare through time. A sectoral approach to sustainability, in terms of this model, will be justified if substitution possibilities between that sector and the rest of the economy are limited. This assumption is examined in relation to the water sector, and it is found that further assumptions about substitution possibilities need to be made within the sector itself. Suggestions are offered as to how such substitutions might be made to advantage, which is contrasted to recent water management practices in England and Wales. It is argued that assumptions about substitution possibilities are in general overly restrictive, with the result that sustainability objectives fall short of optimum levels that could be achieved.

Optimal growth with unobservable resources and learning

This paper examines the problem of choosing optimal resource consumption from an imperfectly observable aggregate capital, wealth or resource stock which the decision-maker learns about over time. Learning is complicated by the fact that the planner receives information about an object (the true resource stock) which is a moving target. Under the assumption that the utility of zero consumption is − ∞ we show that the optimal policy follows a completely deterministic ‘cautious’ or ‘minmax’ policy that assumes the worst in each period and optimizes against that. When this model is compared to a model with completely observable wealth levels the following insights are obtained: (1) there is ‘over-saving,’ (2) investment and output processes are more volatile than consumption, and (3) regressions underestimate the risk aversion of agents. Information about the wealth or stock level is only valuable if it alters the support of the agent's beliefs. Thus, information may be statistically informative yet economically valueless. If information changes the support of the agent's beliefs then the optimal solution features an endogenous resource ‘discovery’ process.

Disutility of pollution and endogenous growth

Endogenous growth is generally built on a positive externality hypothesis which is the opposite of a negative externality caused by pollution. We study a linear technology with simple assumption: an aggregate capital stock which represents a learning by doing effect and a pollution flow proportional to production. In this framework, we analyse the precise effects on growth of the disutility of pollution and its interaction with the utility of consumption in an economy without abatement technology. The decentralized equilibrium always leads to unlimited growth, but optimal growth is often limited (the negative effect of pollution dominating the positive effect of learning by doing). In this case, the optimal policy which leads the decentralized economy to follow the optimal growth path is to tax capital; in contrast with the optimal subsidy policy in an economy without pollution. When an abatement technology is introduced, the optimal solution can lead the economy to unlimited growth, whatever the form of the utility function.

Product diversity, endogenous markups, and development traps

We analyze the implications of endogenous markups for the dynamics of capital accumulation, in an environment in which the degree of competition increases with economic development. In equilibrium, markups are inversely related to the aggregate capital stock, which makes it possible for the marginal revenue product of capital to be nonmonotonic, even if the marginal product of capital is strictly diminishing. That feature raises the possibility of multiple steady states and, most interestingly, multiple equilibrium paths (converging to different steady states) for given initial conditions. We conclude by discussing some of the predictions of our model and assessing their empirical relevance.

Capital Stock Depreciation, Tax Rules, and Composition of Aggregate Investment

I estimate time varying aggregate capital stock depreciation rates for the post-war u.s. economy using capital-investment evolution equation along with the data on the annual net capital stock and corresponding quarterly gross investment series. I estimate depreciation rates of consumer durable goods, producer durable goods, and nonresidential business structures. The estimation results suggest that the three depreciation rate series have been behaving very differently over time. In particular, I find that over time the implied depreciation rate of nonresidential business structures has remained stable, the implied depreciation rate of consumer durable goods has been steadily declining, while the implied depreciation rate of producer durable goods has been increasing, especialIy during the last 10-15 years. These findings are interpreted in terms of the changes in the composition of the aggregate nonresidential business fixed and producer durable good capital stocks. In addition, I discuss the implications of the changes introduced during the 1980s in rules and regulations governing a depreciation accounting for tax purposes, and their effect on the estimates of capital depreciation rates derived in this paper. The main argument the paper makes is that technological progress may be leading to accelerated depreciation of producer durable goods and equipment since newer and more advanced technology makes older equipment obsolete. The empirical evidence reported in this paper supports this argument.

Is technical change embodied in the capital stock or new investment?

The question of technical change and productivity growth is one of the fundamental empirical issues of our time. Surprisingly, Solow's original question of whether technical change is embodied in investment or the entire capital stock has been largely neglected. This paper seeks to bridge the early work of Solow and others on the extent of embodiment of technical change with the more modern approach to estimating the structure of production and technical change using multifactor cost functions. We also attempted to identify the source and structural nature of embodied technical change by decomposing it. Our theoretical model is applied to a pooled cross-section of six OECD countries for the 1965–1989 period. Our preferred model is one of full factor-augmenting embodied technical change because technical change augmenting the entire capital stock tends to overstate quality change in the aggregate capital stock more than that embodied in new investment. This model specification supports the view that technical change is embodied in the stock of capital structure and is embodied in new investment of capital equipment.