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Interpreting estimation results of Euler equation investment models when factor markets are imperfectly competitive

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Author Info
Janz, Norbert

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Abstract

In this paper the standard Euler equation investment model with imperfectly competitive product markets is extended for imperfectly competitive structures on the factor markets: labour markets and markets for investment goods. This extension leads to two additional explanatory variables in the Euler equation. Although economically reasonable, the resulting equation for a simple reason cannot be estimated: parts of the explanatory variables are perfectly collinear. For estimation purposes at least one of these variables has to be neglected. Neglecting one of the additional variables, the coefficients to be estimated have to be interpreted as linear combinations of the 'true' coefficients. The differences between the 'true' coefficients and the linear combinations are numerically demonstrated.

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Publisher Info
Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 97-29.

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Date of creation: 1997
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Handle: RePEc:zbw:zewdip:5131

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Related research
Keywords: Firm Investment Behaviour; Euler Equation Model;

Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing

References listed on IDEAS
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  1. Chow, G.C., 1992. "Optimal Control Without Solving the Bellman Equations," Papers 364, Princeton, Department of Economics - Econometric Research Program.
  2. Chow, G.C., 1991. "Dynamic Optimization Without Dynamic Programming," Papers 361, Princeton, Department of Economics - Econometric Research Program.
  3. Chow, Gregory C., 1992. "Dynamic optimization without dynamic programming," Economic Modelling, Elsevier, vol. 9(1), pages 3-9, January. [Downloadable!] (restricted)
  4. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Blackwell Publishing, vol. 61(2), pages 197-222, April. [Downloadable!] (restricted)
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  5. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1981-1), pages 67-140. [Downloadable!]
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