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The Replacement Problem

Discussion Paper 95 | Published December 1, 1994

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The Replacement Problem


We construct a vintage capital model of economic growth in which the decision to replace old technologies with new ones is modeled explicitly. Depreciation in this environment is an economic, not a physical concept. We describe the balanced growth paths and the transitional dynamics of this economy. We illustrate the importance of vintage capital by analyzing the response of the economy to fiscal policies designed to stimulate investment in new technologies.

Published In: Journal of Monetary Economics (Vol. 40, No. 3, December 1997, pp. 457-499)