Year: 2024
Type: article
Abstract: The average depreciation rate in the United States has increased since the 1970s, a pattern most likely matched in other advanced economies. We argue that a higher depreciation rate has reduced the risk-free interest rate. We do so in a quantitative overlapping-generations model which allows for risk-premia and market power. We show that the importance of the rate of depreciation on the risk-free interest rate depends crucially on the elasticity of intertemporal substitution as well as the size of market power. Our calibrated model shows that higher depreciation plausibly reduced the risk-free rate by 30 basis points over the past half century. We contrast our results with models using a representative-agent framework (Farhi and Gourio in Accounting for macro-finance trends: market power, intangibles, and risk premia. Brookings papers on economic activity, 147, 2019) which typically do not find a role for the rate of depreciation.
Source: Journal of Economic Growth
Authors: Carl-Johan Dalgaard, Morten Olsen
Institutions: University of Copenhagen, Centre for Economic Policy Research
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,990
Funder: Københavns Universitet
OpenAlex ID: W4403619429