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Time-To-Build and Convex Adjustment Costs

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  • Petya Koeva Brooks
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    Abstract

    This paper incorporates time-to-build into the standard investment model with convex adjustment costs. The empirical Euler equation is estimated using a U.S. firm-level panel from Compustat. In spite of the introduction of time-to-build, the magnitude of the implied adjustment costs is unrealistically high. Exploiting another approach, I test directly the restrictions imposed by time-to-build on the investment equation. The results indicate that these restrictions cannot be rejected for five of the sixteen industries in the sample. Finally I show that time-to-build can explain approximately one-third of the variation in persistence of structure investment across four-digit industries.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/9.

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    Length: 23
    Date of creation: 01 Jan 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/9

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    1. Andrew B. Abel & Olivier J. Blanchard, 1986. "Investment and Sales: Some Empirical Evidence," NBER Working Papers 2050, National Bureau of Economic Research, Inc.
    2. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 197-222, April.
    3. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
    4. Stephen Oliner & Glenn Rudebusch & Daniel Sichel, 1993. "New and old models of business investment: a comparison of forecasting performance," Working Paper Series / Economic Activity Section 141, Board of Governors of the Federal Reserve System (U.S.).
    5. Cummins, Jason G. & Hassett, Kevin A., 1992. "The Effects of Taxation on Investment: New Evidence from Firm Level Panel Data," National Tax Journal, National Tax Association, vol. 45(3), pages 243-51, September.
    6. Petya Koeva Brooks, 2000. "The Facts About Time: To-Build," IMF Working Papers 00/138, International Monetary Fund.
    7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    8. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
    9. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Jönsson, Kristian, 2005. "Real Exchange Rate and Consumption Fluctuations following Trade Liberalization," Working Paper Series 187, Sveriges Riksbank (Central Bank of Sweden).
    2. Tsoukalas, John, 2009. "Time to Build Capital: Revisiting Investment-Cash Flow Sensitivities," MPRA Paper 18640, University Library of Munich, Germany.
    3. World Bank, 2003. "Azerbaijan : Public Expenditure Review," World Bank Other Operational Studies 13825, The World Bank.
    4. Charlotta Groth & Hashmat Khan, 2007. "Investment adjustment costs: evidence from UK and US industries," Bank of England working papers 332, Bank of England.
    5. Jönsson, Kristian, 2004. "Real Exchange Rate and Consumption Fluctuations following Trade Liberalization," Working Paper Series in Economics and Finance 568, Stockholm School of Economics, revised 04 Jan 2005.
    6. Charles Himmelberg & Alessandra del Boca & Marzio Galeotti & Paola Rota, 2005. "Investment and Time to Plan: A Comparison of Structures vs. Equipment in a Panel of Italian Firms," Working Papers 2005.54, Fondazione Eni Enrico Mattei.
    7. Hashmat Khan & Charlotta Groth, 2007. "Investment Adjustment Costs: An Empirical Assessment," Carleton Economic Papers 07-08, Carleton University, Department of Economics, revised Dec 2010.

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