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ABSTRACT:
We measure the return to capital directly from the NIPA and BEA data and examine the return implications of the real business cycle model. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. The standard business cycle model captures almost 50% of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with stochastic taxes which captures nearly 80% of the relative volatility in the return to capital.

SUGGESTED CITATION:
Paul Gomme, B Ravikumar, and Peter Rupert, "The Return to Capital and the Business Cycle" (May 1, 2007). Department of Economics, UCSB. Departmental Working Papers. Paper 08-07.
http://repositories.cdlib.org/ucsbecon/dwp/08-07