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Aggregate business fixed investment

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  • Björn A. Hauksson
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    Abstract

    An aggregate business fixed investment error correction model (ECM) is estimated with Icelandic data. The user cost of capital increased considerably in the 1980s as capital markets in Iceland were liberalised and interest rates were adjusting. From the 1990s and onwards, however, the user cost has been decreasing steadily. And the relative price of business investment has been downward trending since the 1980s. A high Q ratio over the period portrays an increased demand for capital. The first order condition of capital for profits which is derived for a constant elasticity of substitution production function has minor long-run role for the user cost. Investment and capital, and investment, value added and the user cost do, however, give expected estimates of cointegration coefficients. In the short-run dynamics of the ECM, gearing, Q and profit ratios move with investment. Official figures show an unprecedented capital decrease in the 1990s in Iceland. The possibility of mismeasured technology investment is explored briefly.

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    Bibliographic Info

    Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp27_bjorn.

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    Date of creation: Sep 2005
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    Handle: RePEc:ice:wpaper:wp27_bjorn

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    1. Andrea Caggese, 2001. "Financing Constraints, Irreversibility, and Investment Dynamics," Working Papers 53, Barcelona Graduate School of Economics.
    2. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. James Breece & Vincenzo Cassino, 1998. "The Forecasting and Policy System: demand-side satellite models," Reserve Bank of New Zealand Discussion Paper Series G98/3, Reserve Bank of New Zealand.
    4. Colin Ellis & Simon Price, 2003. "UK business investment: long-run elasticities and short-run dynamics," Bank of England working papers 196, Bank of England.
    5. Andrew Benito & Garry Young, 2001. "Hard Times or Great Expectations?: Dividend omissions and dividend cuts by UK firms," Bank of England working papers 147, Bank of England.
    6. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-21, March.
    7. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
    8. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
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