Indeterminacy,capital maintenance expenditures and the business cycle |
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| Institution: | 1. Érudite, Université Paris-Est, and TEPP, Faculté de Sciences économiques et de gestion, 61, Avenue du Général de Gaulle, 94010 Créteil Cedex, France;2. Érudite, Université Paris-Est, Faculté de Sciences économiques et de gestion, 61, Avenue du Général de Gaulle, 94010 Créteil Cedex, France;1. DRM Finance, Université Paris Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France;2. IPAG Business School (IPAG Lab), 184 Boulevard Saint-Germain, 75006 Paris, France;1. Department of Economics, Auburn University, 0339 Haley Center, Auburn, AL 36849, United States;2. Department of Economics, Auburn University, AL 36849, United States |
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| 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. |
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| Keywords: | Indeterminacy Maintenance expenditures Business cycles |
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