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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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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Tavani, Daniele, 2008. "Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource," MPRA Paper 11525, University Library of Munich, Germany.
  5. 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.
  6. Andrew T. Young & Hernando Zuleta & Andres Garcia-Suaza, 2010. "Evidence of Induced Innovation in US Sectoral Capital’s Shares," Working Papers 10-03, Department of Economics, West Virginia University.
  7. 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.
  8. Dalgaard, Carl-Johan & Jensen, Martin Kaae, 2009. "Life-cycle savings, bequest, and a diminishing impact of scale on growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1639-1647, September.
  9. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies.
  10. 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.
  11. 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.
  12. 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.

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