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The stock market and capital accumulation: an application to UK data

  • Demetrios Eliades
  • Olaf Weeken
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    Because of the difficulty in measuring investment in intangible assets and frequent data revisions, estimates based on National Accounts investment data provide an imperfect measure of the capital stock. Following the influential work by Robert Hall for the United States, this paper provides an alternative measure of the UK capital stock based on asset prices. This market-based measure reflects the premise that in fair-valued financial markets the value of firms' securities reflects the value of their productive assets. In line with Hall's results for the United States, the paper suggests that for a range of adjustment costs, depreciation rates and starting values, market-based estimates of the UK capital stock have differed substantially from those based on National Accounts investment data. Despite some advantages over National Accounts based measures, market-based measures are likely to be more volatile, because financial markets' assessment of the value of intangible assets can potentially change rapidly. Nevertheless, they can be a useful cross-check of the National Accounts based measures of the UK capital stock.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP251.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 251.

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    Date of creation: Feb 2005
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    Handle: RePEc:boe:boeewp:251
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    1. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
    2. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December.
    3. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    4. Robert E. Hall, 2003. "Dynamics of corporate earnings," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    5. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
    6. Lettau, Martin & Ludvigson, Sydney, 2001. "Time-Varying Risk Premia and the Cost of Capital: An Alternative Implication of the Q Theory of Investment," CEPR Discussion Papers 3103, C.E.P.R. Discussion Papers.
    7. Baruch Lev, 2003. "Remarks on the measurement, valuation, and reporting of intangible assets," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 17-22.
    8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    9. Robert E. Hall, 2001. "Struggling to Understand the Stock Market," American Economic Review, American Economic Association, vol. 91(2), pages 1-11, May.
    10. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
    11. Leonard Nakamura, 1999. "Intangibles: what put the new in the new economy?," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 3-16.
    12. Nicholas Oulton & Sylaja Srinivasan, 2003. "Capital stocks, capital services, and depreciation: an integrated framework," Bank of England working papers 192, Bank of England.
    13. Kevin A. Hassett & R. Glenn Hubbard, 1996. "Tax Policy and Investment," NBER Working Papers 5683, National Bureau of Economic Research, Inc.
    14. Donald Robertson & Stephen Wright, 2006. "Dividends, Total Cash Flow to Shareholders, and Predictive Return Regressions," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 91-99, February.
    15. Leonard Nakamura, 2001. "Investing in intangibles: is a trillion dollars missing from the GDP?," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 27-36.
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