Ageing of Capital Stock and Fiscal Policy

This chapter could also have been titled: “Replacement and Modernization Investments” in reminiscence of a paper by Feldstein and Foot published in 1971 with the title: “The Other Half of Gross Investment: Replacement and Modernization Expenditures”. These authors pointed out that besides net investment, the half of the story on which investment theory focuses, there is also replacement investment being of an as important order of magnitude. Their point is even more pertinent twenty years later: the importance of replacement investment relative to net investment steadily increased in the meantime. For example, in the United States, the real net investment (as a share of NNP) remained below its long-term 1947–1988 average in the 80’s, whereas the real gross investment (as a percent of GNP) remained over its long-term 1947–1988 average in the same period! Therefore, it is very important to dispose of a tractable model of “replacement and modernization expenditures”. The purpose of Chapter Two is precisely to set up such a model. The model is used to investigate whether there is a link between fiscal policy and the average age of capital stock. It is found that if depreciation through use is not negligible, a policy to spur investment is only possible at the cost of causing an ageing of capital stock.