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Is Investment Not Sensitive to its User Cost? The Macro Evidence Revisited

Listed author(s):
  • Aled ab Iorwerth
  • Jeff Danforth

A key parameter in determining the response of investment to changes in its price is the user cost elasticity. But the empirical evidence on the user cost elasticity is mixed.. Traditional macro-econometric estimation has yielded a value close to zero whereas newer micro-econometric estimates yield values closer to one. We re-examine the macro-econometric estimates to see whether there are any potential shortcomings in that approach. We identify three: whether a user cost shock is seen as permanent or temporary, potential endogeneity of the user cost, and aggregation errors. Introducing corrections for these problems yields elasticity estimates closer to those of the micro-based estimates. Un paramètre clé dans la détermination de la réponse de l’investissement aux changements dans son prix est l’élasticité par rapport au coût d’usage. Mais il n’existe pas de consensus dans la littérature empirique sur ce sujet. Les estimations macro-économétriques traditionnelles ont eu tendance à donner des valeurs près de zéro. En revanche, les estimations micro-économétriques plus récentes ont eu tendance à produire des valeurs plus proche de l’unité. Dans ce texte, nous examinons les résultats macro-économétriques afin d’identifier les sources de cette divergence entre les analyses macro-économiques et micro-économiques. Nous en identifions trois sources de divergence: il est important d’identifier si les changements de coût d’usage sont permanents ou temporaires; la présence probable d’endogénéité du coût d’usage; et l’utilisation de données d’investissement trop agrégées. En introduisant des corrections pour ces problèmes, nos estimations macro-économiques donnent des résultats plus proche de ceux obtenus à l’aide de données micro-économiques, c’est-à-dire, des valeurs de l’élasticité de l’investissement par rapport à son coût d’usage près de l’unité.

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Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2004-05.

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Handle: RePEc:fca:wpfnca:2004-05
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