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Quantifying UK Capital Adjustment Costs

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  • CHARLOTTA GROTH

Abstract

This paper estimates UK capital adjustment costs, using manufacturing and service industry data for 1970-2000. There is evidence of significant adjustment costs, with a 1% increase in investment reducing value added by 0.05%. This implies an elasticity of investment with respect to Tobin's "q" of 2.5, and a convergence time for capital of 12 years. The results suggest that adjustment costs may have caused half of the slowdown in UK total factor productivity (TFP) growth during the second half of the 1990s. The impact is larger than that reported for the United States, reflecting larger adjustment costs and higher investment growth. Copyright (c) 2007. The Bank of England.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 75 (2008)
Issue (Month): 298 (05)
Pages: 310-325

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Handle: RePEc:bla:econom:v:75:y:2008:i:298:p:310-325

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Cited by:
  1. Hashmat Khan & John Tsoukalas, 2011. "Effects of Productivity Shocks on Employment: UK Evidence (revised 25 February 2013)," Carleton Economic Papers 11-05, Carleton University, Department of Economics, revised 25 Feb 2013.
  2. MORIKAWA Masayuki, 2008. "Demand Fluctuations and Productivity of Service Industries," Discussion papers 08030, Research Institute of Economy, Trade and Industry (RIETI).
  3. Charlotta Groth & Hashmat Khan, 2007. "Investment adjustment costs: evidence from UK and US industries," Bank of England working papers 332, Bank of England.
  4. Robert S. Chirinko & Debdulal Mallick, 2008. "The Marginal Product of Capital: A Persistent International Puzzle," CESifo Working Paper Series 2399, CESifo Group Munich.
  5. Elisa Lanzi & Ian Sue Wing, 2013. "Capital Malleability, Emission Leakage and the Cost of Partial Climate Policies: General Equilibrium Analysis of the European Union Emission Trading System," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 55(2), pages 257-289, June.

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