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Tax Policy and Business Fixed Investment During the Regan Era

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  • Bischoff, Charles W.
  • Kokkelenberg, Edward C.
  • Terregrossa, Ralph A.

Abstract

We examine the impact of major tax legislation on business capital investment during the 1980-88 period. We detail the tax changes and imbed them into a neoclassical rental price of capital goods. We then use this rental price in two popular models of business fixed investment, a standard and a modified neo-classical model. We estimate these two models along with an accelerator model of capital investment. The models, in general, exhibit parameter instability regardless of fit. We then develop a model incorporating expected delivery lags for new capital goods and embed a forecasted output and the rental price of capital services. Again, parameter instability and fit are examined. Finally we conduct simulations of tax, price and output shocks. We conclude that the new model has parameter stability, and that the net effect of Reagan's tax policies was small.

Suggested Citation

  • Bischoff, Charles W. & Kokkelenberg, Edward C. & Terregrossa, Ralph A., 1990. "Tax Policy and Business Fixed Investment During the Regan Era," Staff Papers 121533, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudasp:121533
    DOI: 10.22004/ag.econ.121533
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    References listed on IDEAS

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    1. Beach, Charles M & MacKinnon, James G, 1978. "A Maximum Likelihood Procedure for Regression with Autocorrelated Errors," Econometrica, Econometric Society, vol. 46(1), pages 51-58, January.
    2. Bernanke, Ben & Bohn, Henning & Reiss, Peter C., 1988. "Alternative non-nested specification tests of time-series investment models," Journal of Econometrics, Elsevier, vol. 37(3), pages 293-326, March.
    3. Ando, Albert K, et al, 1974. "On the Role of Expectations of Price and Technological Change in an Investment Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 384-414, June.
    4. Robert E. Hall, 1977. "Investment, Interest Rates, and the Effects of Stabilization Policies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 61-122.
    5. Bischoff, Charles W, 1970. "A Model of Nonresidential Construction in the United States," American Economic Review, American Economic Association, vol. 60(2), pages 10-17, May.
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    Cited by:

    1. Terregrossa, Ralph A., 1997. "Capital depreciation and investment demand," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(1), pages 79-95.

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