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Explaining the Investment Boom of the 1990s

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  • Tevlin, Stacey
  • Whelan, Karl

Abstract

Real equipment investment in the United States boomed in the 1990s, led by soaring investment in computers. We find that traditional aggregate econometric models completely fail to capture the magnitude of this growth-mainly because these models neglect to address two features that were crucial (and unique) to the 1990s' investment boom. First, the pace at which firms replace depreciated capital increased. Second, investment was more sensitive to the cost of capital. We document that these two features stem from the special behavior of investment in computers and therefore propose a disaggregated approach. This produces an econometric model that successfully explains the 1990s' equipment investment boom.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 1 (February)
Pages: 1-22

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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:1:p:1-22

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
  2. Stephen Oliner & Glenn Rudebusch & Daniel Sichel, 1993. "New and old models of business investment: a comparison of forecasting performance," Working Paper Series / Economic Activity Section 141, Board of Governors of the Federal Reserve System (U.S.).
  3. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  4. Stephen D. Oliner, 1993. "Constant-Quality Price Change , Depreciation, and Retirement of Mainframe Computers," NBER Chapters, in: Price Measurements and Their Uses, pages 19-62 National Bureau of Economic Research, Inc.
  5. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Working Papers 5546, National Bureau of Economic Research, Inc.
  6. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
  7. Bernanke, Ben & Bohn, Henning & Reiss, Peter C., 1988. "Alternative non-nested specification tests of time-series investment models," Journal of Econometrics, Elsevier, vol. 37(3), pages 293-326, March.
  8. Feldstein, Martin S & Rothschild, Michael, 1974. "Towards an Economic Theory of Replacement Investment," Econometrica, Econometric Society, vol. 42(3), pages 393-423, May.
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Cited by:
  1. Alice Albonico & Sarantis Kalyvitis & Evi Pappa, . "Capital Maintenance and Depreciation over the Business Cycle," DEOS Working Papers 1326, Athens University of Economics and Business.
  2. Steven Pennings & Rod Tyers, 2008. "Increasing Returns, Financial Capital Mobility and Real Exchange Rate Dynamics," The Economic Record, The Economic Society of Australia, vol. 84(s1), pages S141-S158, 09.
  3. Cette, G. & Lopez, J., 2009. "ICT Demand Behaviour: an International Comparison," Working papers 252, Banque de France.
  4. Renee van Eyden & Goodness C. Aye & Rangan Gupta, 2012. "Predictive Ability of Competing Models for South Africa’s Fixed Business Non- Residential Investment Spending," Working Papers 201229, University of Pretoria, Department of Economics.
  5. Jonathan McCarthy, 2001. "Equipment expenditures since 1995: the boom and the bust," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 7(Oct).
  6. Jonathan Temple & Cliff Attfield, 2004. "Measuring trend growth: how useful are the great ratios?," Money Macro and Finance (MMF) Research Group Conference 2003 101, Money Macro and Finance Research Group.
  7. Sumru Altug & Fanny S. Demers & Michel Demers, 2004. "Tax Policy and Irreversible Investment," CDMA Working Paper Series 200404, Centre for Dynamic Macroeconomic Analysis.
  8. Kiley, Michael T., 2001. "Computers and growth with frictions: aggregate and disaggregate evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 55(1), pages 171-215, December.
  9. Cliff L. F. Attfield & Jonathan R. W. Temple, 2006. "Balanced growth and the great ratios: new evidence for the US and UK," Centre for Growth and Business Cycle Research Discussion Paper Series 75, Economics, The Univeristy of Manchester.
  10. Kosta Josifidis & Alpar Lošonc & Novica Supić, 2010. "Neoliberalism: Befall or Respite?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(1), pages 101-117, March.
  11. Colin Ellis & Simon Price, 2004. "UK business investment: long-run elasticities and short-run dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 27, Money Macro and Finance Research Group.
  12. Lynne Cockerell & Steven Pennings, 2007. "Private Business Investment in Australia," RBA Research Discussion Papers rdp2007-09, Reserve Bank of Australia.
  13. Hasan Bakhshi & Nicholas Oulton & Jamie Thompson, 2003. "Modelling investment when relative prices are trending: theory and evidence for the United Kingdom," Bank of England working papers 189, Bank of England.
  14. Karl Whelan, 2000. "A guide to the use of chain aggregated NIPA data," Finance and Economics Discussion Series 2000-35, Board of Governors of the Federal Reserve System (U.S.).
  15. Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.
  16. Sylvain Martel, 2005. "Y a-t-il eu surinvestissement au Canada durant la seconde moitié des années 1990?," Working Papers 05-5, Bank of Canada.
  17. Bessler, David A. & Leatham, David J. & Yang, Juan, 2005. "In Search of the "Bank Lending Channel": Causality Analysis for the Transmission Mechanism of U.S. Monetary Policy," 2005 Annual meeting, July 24-27, Providence, RI 19558, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  18. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.

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