English, Article, Journal or magazine article edition: The Return to Capital and the Business Cycle Paul Gomme; B. Ravikumar; Peter Rupert

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Return to Capital and the Business Cycle
Author
  • Paul Gomme
  • B. Ravikumar
  • Peter Rupert
Physical Description
  • preprint
Notes
  • Real business cycle models have difficulty replicating the volatility of S&​P 500 returns. This fact should not be surprising since real business cycle theory suggests that the return to capital should be measured by the return to aggregate market capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&​P 500 returns. Our benchmark model captures almost 40 percent of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with higher risk aversion, which captures over 60 percent of the relative volatility in the return to capital.
  • Business cycles ; Capital
  • RePEc:fip:fedcwp:0603
  • We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&​P 500 returns. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with stochastic taxes which captures nearly 80% of the relative volatility in the return to capital.
  • return to capital, volatility, real business cycles,
  • RePEc:cdl:ucsbec:08-07
  • We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. Specifically, we construct a quarterly time series of the after-tax return to business capital. The business cycle properties of this return differs considerably from those of the S&​P 500 returns. First, its volatility is considerably smaller than that of S\&​P 500 returns. Second, our measured return is procyclical and leads output by one quarter; S&​P 500 returns are countercyclical and lead the cycle by four quarters. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output), and does well in capturing the lead-lag pattern. We consider several departures from the benchmark model; the model with stochastic taxes captures nearly 85% of the relative volatility in the return to capital and the model with high risk aversion captures 80% of the relative volatility. We then include capital gains in our measurement and use a model with investment specific technological change to address the higher volatility in the return to capital. This model accounts for more than 80% of the return volatility, and essentially all of the relative volatility.
  • return to capital, business cycles, asset returns
  • RePEc:crd:wpaper:08002
Language
  • English
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