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That Elusive Elasticity: A Long-Panel Approach To Estimating The Price Sensitivity Of Business Capital

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  • Robert S. Chirinko

    ()
    (Emory University)

  • Steven M. Fazzari

    ()
    (Washington University)

  • Andrew P. Meyer

    ()
    (Federal Reserve Bank of St. Louis)

Abstract

The sensitivity of business capital formation to its user cost plays a key role in the analysis of many economic issues. Although this elasticity has been the subject of an enormous number of studies, a consensus remains elusive. We develop an estimation strategy that exploits panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated user cost elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

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Bibliographic Info

Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number B3-1.

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Date of creation: Jan 2002
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Handle: RePEc:cpd:pd2002:b3-1

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Citations

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Cited by:
  1. Simon Price, 2004. "UK investment and the return to equity: Q redux," Money Macro and Finance (MMF) Research Group Conference 2004 87, Money Macro and Finance Research Group.
  2. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Philip Vermeulen & Ulf Von Kalckreuth, 2003. "New Findings on Firm Investment and Monetary Policy Transmission in the Euro Area," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00119490, HAL.
  3. Colin Ellis & Simon Price, 2003. "UK business investment: long-run elasticities and short-run dynamics," Bank of England working papers 196, Bank of England.
  4. Andrew T. Young & Hernando Zuleta & Andrés F. García-Suaza, 2010. "Evidence of induced innovation in US sectoral Capital’s shares," DOCUMENTOS DE TRABAJO 006740, UNIVERSIDAD DEL ROSARIO.
  5. A. Lans Bovenberg & Lawrence H. Goulder & Mark R. Jacobsen, 2007. "Industry Compensation and the Costs of Alternative Environmental Policy Instruments," NBER Working Papers 13331, National Bureau of Economic Research, Inc.
  6. Tavani, Daniele, 2008. "Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource," MPRA Paper 11525, University Library of Munich, Germany.
  7. 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.
  8. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies.
  9. Cameron, Linda & Chapple, Bryan & Davis, Nick & Kousis , Artemisia & Lewis, Geoff, 2007. "New Zealand Financial Markets, Saving and Investment," Occasional Papers 07/5, Ministry of Economic Development, New Zealand.
  10. Bovenberg, A. Lans & Goulder, Lawrence H. & Jacobsen, Mark R., 2008. "Costs of alternative environmental policy instruments in the presence of industry compensation requirements," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1236-1253, June.
  11. Simon Price & Christoph Schleicher, 2006. "Returns to equity, investment and Q: evidence from the United Kingdom," Bank of England working papers 310, Bank of England.

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