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UK business investment: long-run elasticities and short-run dynamics

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  • Colin Ellis
  • Simon Price

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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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2003 with number 27.

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Date of creation: 27 Sep 2004
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Handle: RePEc:mmf:mmfc03:27

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Web page: http://www.essex.ac.uk/afm/mmf/index.html

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Cited by:
  1. Björn A. Hauksson, 2005. "Aggregate business fixed investment," Economics wp27_bjorn, Department of Economics, Central bank of Iceland.
  2. Lydon, Reamonn Author-X-Name-Reamonn & Scally, John Author-X-Name-John, 2014. "Trends in Business Investment," Quarterly Bulletin Articles, Central Bank of Ireland, pages 76-89, January.
  3. Smith, James, 2008. "That elusive elasticity and the ubiquitous bias: Is panel data a panacea?," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 760-779, June.
  4. 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.
  5. Stephen Millard & John Power, 2004. "The effects of stock market movements on consumption and investment: does the shock matter?," Bank of England working papers 236, Bank of England.

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