Pitfalls in investment Euler equations
AbstractThis paper investigates three pitfalls concerning the test of the Euler equation facing quadratic adjustment costs and perfect capital markets on a large balanced panel data of 4025 french firms. First, the quadratic parameterization of adjustment costs is too restrictive, and power series approximations of adjustment costs are tested. Second, we isolate firms whose optimal Euler condition is not altered even in the presence of fixed adjustment costs. Third, we identify instruments which contribute to model failure via standard GMM\ tests. These methods point that financial instruments contribute to reject strongly the standard model, which shows that it is misspecified.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 18 (2001)
Issue (Month): 2 (April)
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Web page: http://www.elsevier.com/locate/inca/30411
Other versions of this item:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
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