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Empirical evidence on the Euler equation for investment in the US

Author

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  • Guido Ascari
  • Qazi Haque
  • Leandro M. Magnusson
  • Sophocles Mavroeidis

Abstract

The Euler equation model for investment with adjustment costs and variable capital utilization is estimated using aggregate US post-war data with econometric methods that are robust to weak instruments and exploit information in possible structural changes. Various alternative identification assumptions are considered, including external instruments, and instruments obtained from Dynamic Stochastic General Equilibrium models. Results show that the elasticity of capital utilization and investment adjustment cost parameters are very weakly identified. This is because investment appears to be unresponsive to changes in capital utilization and the real interest rate.

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  • Guido Ascari & Qazi Haque & Leandro M. Magnusson & Sophocles Mavroeidis, 2021. "Empirical evidence on the Euler equation for investment in the US," CAMA Working Papers 2021-65, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-65
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    Cited by:

    1. Andreas Tryphonides, 2023. "Identifying Preferences when Households are Financially Constrained," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 521-546, December.
    2. Nicholas Stern & Joseph Stiglitz & Charlotte Taylor, 2022. "The economics of immense risk, urgent action and radical change: towards new approaches to the economics of climate change," Journal of Economic Methodology, Taylor & Francis Journals, vol. 29(3), pages 181-216, July.
    3. Diana Gabrielyan & Lenno Uusküla, 2022. "Inflation Expectations And Consumption With Machine Learning," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 142, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    4. Guido Ascari & Qazi Haque & Leandro M. Magnusson & Sophocles Mavroeidis, 2021. "Empirical evidence on the Euler equation for investment in the US," Papers 2107.08713, arXiv.org, revised Aug 2022.
    5. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2021. "The impact of hedging on risk-averse agents’ output decisions," Economic Modelling, Elsevier, vol. 104(C).
    6. Elminejad, Ali & Havranek, Tomas & Irsova, Zuzana, 2022. "Relative Risk Aversion: A Meta-Analysis," MetaArXiv b8uhe, Center for Open Science.
    7. Xuexin WANG, 2021. "Instrumental variable estimation via a continuum of instruments with an application to estimating the elasticity of intertemporal substitution in consumption," Working Papers 2021-11-06, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    8. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2021. "Discovering the True Schumpeter - New Insights into the Finance and Growth Nexus," CEPR Discussion Papers 16851, C.E.P.R. Discussion Papers.
    9. van den End, Jan Willem & Konietschke, Paul & Samarina, Anna & Stanga, Irina M., 2021. "Macroeconomic reversal rate in a low interest rate environment," Working Paper Series 2620, European Central Bank.
    10. Qazi Haque & Leandro M. Magnusson, 2023. "Identification Robust Empirical Evidence on the Open Economy IS‐Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 345-372, April.
    11. Andreas Tryphonides, 2023. "Identifying Preferences when Households are Financially Constrained," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 521-546, December.

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    More about this item

    Keywords

    Investment; Adjustment costs; Weak identification;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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