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UK Business Investment: Long-Run Elasticities and Short-Run Dynamics

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Author Info
Ellis, Colin (Bank of England)
Simon Price

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Abstract

From neoclassical theory output, capital stock and the user cost are cointegrated; capital and investment also (multi)cointegrate through the capital accumulation identity. An investment equation is estimated on UK data using a new capital stock series and a long series for the weighted cost of capital. Assuming CES technology, the elasticity of substitution is well-determined and below unity. Over-identifying restrictions are accepted. The long-run parameter is robust to alternative specifications, but single-equation investment relationships may obscure the dynamics. The Johansen method is over-sized, but outperforms a single equation test for excluding the capital accumulation identity from the investment equation.

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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 73.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:73

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Web page: http://www.res.org.uk/society/annualconf.asp
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Keywords: investment capital stock identification multicointegration

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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  4. Engsted, Tom & Haldrup, Niels, 1999. " Multicointegration in Stock-Flow Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 237-54, May. [Downloadable!] (restricted)
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  5. Davidson, James, 1998. "Structural relations, cointegration and identification: some simple results and their application," Journal of Econometrics, Elsevier, vol. 87(1), pages 87-113, August. [Downloadable!] (restricted)
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  15. Hubert, Florence & Pain, Nigel, 2001. "Inward Investment and Technical Progress in the United Kingdom Manufacturing Sector," Scottish Journal of Political Economy, Scottish Economic Society, vol. 48(2), pages 134-47, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephen Millard & John Power, . "The effects of stock market movements on consumption and investment: does the shock matter?," Bank of England working papers 236, Bank of England. [Downloadable!]
  2. 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. [Downloadable!]
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