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That Elusive Elasticity: A Long-Panel Approach To Estimating The Price Sensitivity Of Business Capital

  • Robert S. Chirinko

    ()

    (Emory University)

  • Steven M. Fazzari

    ()

    (Washington University)

  • Andrew P. Meyer

    ()

    (Federal Reserve Bank of St. Louis)

The sensitivity of business capital formation to its user cost plays a key role in the analysis of many economic issues. Although this elasticity has been the subject of an enormous number of studies, a consensus remains elusive. We develop an estimation strategy that exploits panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated user cost elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

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Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number B3-1.

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Date of creation: Jan 2002
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Handle: RePEc:cpd:pd2002:b3-1
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  1. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
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