Return to Capital in a Real Business Cycle Model

14 Pages Posted: 13 Oct 2017 Last revised: 15 Oct 2019

See all articles by Paul Gomme

Paul Gomme

Concordia University; CIREQ

B. Ravikumar

Federal Reserve Bank of Saint Louis

Peter Rupert

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: 2017

Abstract

Can the neoclassical growth model generate fluctuations in the return to capital similar to those observed in the United States? Equating stock market returns with the return to capital, the bulk of the literature concludes that it cannot. This article makes two contributions. First is an equivalence for the neoclassical growth model between a stock market return and a return based on income and capital stock data. While the stock market return is extremely volatile, the income-based return is not. Second is the finding that the neoclassical growth model with shocks to labor productivity alone can account for the bulk of the observed volatility of the income-based return to capital (expressed relative to the volatility of income) but little of the volatility of the stock market return. Simultaneously explaining the volatility of the two measures of the return to capital within the neoclassical model will require a theory of the stock market that breaks our return-equivalence results.

Suggested Citation

Gomme, Paul and Ravikumar, B. and Rupert, Peter, Return to Capital in a Real Business Cycle Model (2017). Review, Vol. 99, Issue 4, pp. 337-350, 2017. Available at SSRN: https://ssrn.com/abstract=3051068 or http://dx.doi.org/10.20955/r.2017.337-350

Paul Gomme (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

CIREQ ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

B. Ravikumar

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Peter Rupert

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

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