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Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty

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Author Info

  • Alan Carruth

    ()

  • Andrew Dickerson

    ()

  • Andrew Henley

    ()

Abstract

This paper focuses on the determinants of aggregate investment spending in the UK, for the industrial and commercial company (ICC) sector. Important focal points of our analysis are the role for real profits and the impact of irreversibility and uncertainty in determining aggregate investment spending. Early work on manufacturing investment by Bean (1981a) developed a data-based dynamic specification of considerable complexity. We use multivariate cointegration techniques to discover a parsimonious dynamic model, which can explain the 1980s and early 1990s investment experience of the ICC sector. Our results show that a model based on investment and output alone does not cointegrate, and a short run dynamic model of these variables suffers from heteroscedasticity. This may be consistent with the idea that increased (uncontrolled for) uncertainty has led to increased volatility in investment. Investigation of a more general model indicates that real profits can enhance the explanation of investment spending, and that a potential proxy for uncertainty is the real price of gold.

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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 9704.

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Date of creation: Jun 1997
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Publication status: Forthcoming in Manchester School, 2000
Handle: RePEc:ukc:ukcedp:9704

Contact details of provider:
Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: aggregate investment; real profits; uncertainty;

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References

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  3. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, Department of Economics, University of Kent.
  4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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Citations

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Cited by:
  1. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. " What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-53, April.
  2. Ellis, Colin & Simon Price, 2003. "UK Business Investment: Long-Run Elasticities and Short-Run Dynamics," Royal Economic Society Annual Conference 2003 73, Royal Economic Society.
  3. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "The Effect of Uncertainty on UK Investment Authorisation: Pooled Estimators vs. Heterogeneous Estimators1," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-4, International Conferences on Panel Data.
  4. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Working Papers 01-16, Bank of Canada.
  5. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  6. 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.
  7. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
  8. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.

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