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Behavior of business investment in the USA under variable and proportional rates of replacement

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  • Bitros, George C.
  • Nadiri, M. Ishaq

Abstract

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we test two investment models of neoclassical decent. Model A is based on the conceptualization that business firms have an active replacement investment policy, which renders the replacement rate a determinant of business investment behavior, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning into a constant. The evidence that emerges from the estimations is heavily in favor of Model A on at least three grounds. Namely, first it establishes that the replacement rate is a decisive determinant of investment at all levels of aggregation; Second, it leads to estimates of investment equations with succinct short run and long run dynamics, thus facilitating policy applications; and thirdly, it gives rise to remarkably robust estimates of the elasticities of substitution of capital for labor, output and the replacement rate. When Model B is estimated for the period 1947-1960, it performs as expected, most likely because in short periods remains fairly constant due to long swings in replacement investment.

Suggested Citation

  • Bitros, George C. & Nadiri, M. Ishaq, 2017. "Behavior of business investment in the USA under variable and proportional rates of replacement," MPRA Paper 80594, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80594
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    References listed on IDEAS

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    Cited by:

    1. Bitros, George C., 2019. "Potential output, capital input and U.S. economic growth," MPRA Paper 94141, University Library of Munich, Germany.
    2. Chien-Chiang Lee & Chun-Wei Lin & Chi-Chuan Lee, 0. "The impact of peer effects and economic policy-related uncertainty on U.S. life insurers' investment decisions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 0, pages 1-31.
    3. Chien-Chiang Lee & Chun-Wei Lin & Chi-Chuan Lee, 2021. "The impact of peer effects and economic policy-related uncertainty on U.S. life insurers' investment decisions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(1), pages 22-52, January.

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    More about this item

    Keywords

    Neoclassical models of business investment; elasticities of substitution and output; modes of replacement investment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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