Capital Maintenance and Depreciation over the Business Cycle

Financial support from AUEB Basic Research Funding Program (Contract Number: ΕΡ-1710--28) is acknowledged by Sarantis Kalyvitis. The financial support from the Spanish Ministry of Science and Innovation through grant ECO2012-32392 and the Generalitat of Catalonia through grant SGR2009-00350 is acknowledged by Evi Pappa. Altres ajuts: AUEB/ΕΡ-1710--28 This paper develops and estimates a stochastic general equilibrium model with capital maintenance, which affects endogenously the depreciation rate of capital. The estimate of maintenance series is found to track survey-based measures for Canada quite closely and to generate the procyclical pattern of maintenance observed in the data. We use it to infer the time profile of equipment capital depreciation in Canadian and US manufacturing. Contrary to existing estimates, the depreciation rate is estimated to be volatile and highly procyclical over the last 50 years in both countries.