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Indeterminacy, capital maintenance expenditures and the business cycle

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  • Jiang, Dou

Abstract

This paper examines how maintenance expenditures affect the occurrence of indeterminacy in a two-sector model economy, motivated by the empirical fact that equipment and structures are maintained and repaired. McGrattan and Schmitz's (1999) survey on ‘Capital and Repair Expenditures’ in Canada indicates that maintenance expenditures account for a substantial fraction of output and new investment. It is shown that the endogenous maintenance expenditures reduce the requirement of the degree of increasing returns to scale to generate sunspot equilibria. In fact, the minimum level of the returns to scale required could be as low as 1.0179. This aspect is important since empirical works such as Basu and Fernald (1997) suggest that returns to scale is close to constant.

Suggested Citation

  • Jiang, Dou, 2017. "Indeterminacy, capital maintenance expenditures and the business cycle," Economic Modelling, Elsevier, vol. 61(C), pages 432-438.
    • Handle: RePEc:eee:ecmode:v:61:y:2017:i:c:p:432-438
    DOI: 10.1016/j.econmod.2016.11.008
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    References listed on IDEAS

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    1. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
    2. Ellen R. McGrattan & James A. Schmitz, 1999. "Maintenance and repair: too big to ignore," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Fall), pages 2-13.
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    4. Guo, Jang-Ting & Harrison, Sharon G., 2001. "Indeterminacy with capital utilization and sector-specific externalities," Economics Letters, Elsevier, vol. 72(3), pages 355-360, September.
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    More about this item

    Keywords

    Indeterminacy; Maintenance expenditures; Business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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