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

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  • Janz, Norbert

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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Bibliographic 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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Keywords: Firm Investment Behaviour; Euler Equation Model;

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  1. Chow, Gregory C., 1992. "Dynamic optimization without dynamic programming," Economic Modelling, Elsevier, vol. 9(1), pages 3-9, January.
  2. Chow, G.C., 1992. "Optimal Control Without Solving the Bellman Equations," Papers 364, Princeton, Department of Economics - Econometric Research Program.
  3. Chow, G.C., 1991. "Dynamic Optimization Without Dynamic Programming," Papers 361, Princeton, Department of Economics - Econometric Research Program.
  4. 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(1), pages 67-140.
  5. 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.
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