Data Management

New Perspectives On Depreciation Shocks As A Source Of Business Cycle Fluctuations

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Executive Summary

In this paper the authors study the transmission for capital depreciation shocks. The existing literature in the Real Business Cycle tradition has concluded that these shocks are irrelevant for business cycle fluctuations. They show that these shocks are potentially important drivers of aggregate fluctuations in a New Keynesian model. Nominal rigidities and some persistence in the shock process are the key ingredients to generate co-movement across real variables. Recent papers have used shocks to the capital accumulation process to explain the Great Recession of the late 2000s, cf. Gertler and Karadi (2011) and Gertler and Kiyotaki (2011), and the following jobless recovery, cf. Shimer (2010).

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