Capital Maintenance and Depreciation over the Business Cycle

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 ob-served in the data. We use it to infer the time profile of equipment capital depre-ciation 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