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Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation
Author(s) -
Angelopoulou Eleni,
Kalyvitis Sarantis
Publication year - 2012
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-78.3.1057
Subject(s) - depreciation (economics) , economics , euler equations , investment (military) , capital (architecture) , simultaneous equations model , aggregate (composite) , fixed capital , econometrics , physical capital , microeconomics , quadratic equation , monetary economics , capital formation , financial capital , mathematics , human capital , market economy , profit (economics) , mathematical analysis , materials science , archaeology , politics , political science , law , composite material , history , geometry
This article looks at the empirical consequences of introducing endogenous capital depreciation in the standard neoclassical model with quadratic adjustment costs. To this end, we formulate an empirical specification that accommodates capital maintenance and utilization in the Euler equations for aggregate investment. The empirical estimates with data from the Canadian Survey on Capital and Repair Expenditures show that, in contrast to the existing literature, the performance of the Euler equations is improved when we account for the impact of variable capital depreciation.