Numerous dynamic stochastic general equilibrium (DSGE) macroeconomic models now allow for variation in the depreciation rate of capital. The most common approach treats the depreciation rate as an endogenous variable such that the choice to use capital intensively or to spend little on maintenance and repair results in high depreciation [Greenwood, Hercowitz and Huffman (1988); Burnside, Eichenbaum and Rebelo (1996); King and Rebelo (2000) for the former; McGrattan and Schmitz (1999), Collard and Kollintzas (2000) and Licandro and Puch (2000) for the latter].
Procyclical variation in capital utilization amplifies the effect of a technology shock on output. When the depreciation rate is a function of maintenance and repair, the assumption is that each unit of capital is matched with labor input that is geared toward either production or capital maintenance and repair.
In both of these scenarios, variation in the depreciation rate is a means and not an end. Endogenous depreciation equates margins at less than full capital utilization or introduces a role for large, countercyclical expenditures on maintenance and repair. In this way, endogenous depreciation serves to amplify and augment the persistence of the effects of technology shocks on output. But, fully endogenous depreciation only amplifies technology shocks and does not allow for random changes in the depreciation rate as an independent source of economic fluctuations.
Stochastic depreciation, on the other hand, allows depreciation shocks to serve as an additional driving force behind macroeconomic fluctuations, along with technology shocks. The motivation for the stochastic process rests with the observation that for many types of capital particularly intangible assets, such as music, film, or software the economic lifespan does not necessarily obey a decay function of time and intensity of use. Along these lines, Cooley, Greenwood and Yorukoglu (1997) present a vintage capital model in which capital is scrapped because of economic obsolescence rather than physical break down. Even tangible assets such as machinery and structures have uncertain and variable shelf lives after which they are scrapped as a result of economic obsolescence. Of course, tangible assets are also subject to physical shocks, such as fire and storm. At the same time, compositional shifts between sectors can also lead to time variation in the aggregate depreciation rate.
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