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Aggregate business fixed investment

  • Björn A. Hauksson
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    An aggregate business fixed investment error correction model (ECM) is estimated with Icelandic data. The user cost of capital increased considerably in the 1980s as capital markets in Iceland were liberalised and interest rates were adjusting. From the 1990s and onwards, however, the user cost has been decreasing steadily. And the relative price of business investment has been downward trending since the 1980s. A high Q ratio over the period portrays an increased demand for capital. The first order condition of capital for profits which is derived for a constant elasticity of substitution production function has minor long-run role for the user cost. Investment and capital, and investment, value added and the user cost do, however, give expected estimates of cointegration coefficients. In the short-run dynamics of the ECM, gearing, Q and profit ratios move with investment. Official figures show an unprecedented capital decrease in the 1990s in Iceland. The possibility of mismeasured technology investment is explored briefly.

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    Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp27_bjorn.

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    Date of creation: Sep 2005
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    Handle: RePEc:ice:wpaper:wp27_bjorn
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    1. Colin Ellis & Simon Price, 2004. "UK business investment: long-run elasticities and short-run dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 27, Money Macro and Finance Research Group.
    2. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
    3. Andrea Caggese, 2001. "Financing constraints, irreversibility and investment dynamics," Economics Working Papers 1008, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2006.
    4. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
    5. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-21, March.
    6. Andrew Benito & Garry Young, 2003. "Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 531-555, December.
    7. James Breece & Vincenzo Cassino, 1998. "The Forecasting and Policy System: demand-side satellite models," Reserve Bank of New Zealand Discussion Paper Series G98/3, Reserve Bank of New Zealand.
    8. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
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