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UK Business Investment: Long-Run Elasticities and Short-Run Dynamics

  • Ellis, Colin

    (Bank of England)

  • Simon Price

From neoclassical theory output, capital stock and the user cost are cointegrated; capital and investment also (multi)cointegrate through the capital accumulation identity. An investment equation is estimated on UK data using a new capital stock series and a long series for the weighted cost of capital. Assuming CES technology, the elasticity of substitution is well-determined and below unity. Over-identifying restrictions are accepted. The long-run parameter is robust to alternative specifications, but single-equation investment relationships may obscure the dynamics. The Johansen method is over-sized, but outperforms a single equation test for excluding the capital accumulation identity from the investment equation.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 73.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:73
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