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Behavior of business investment in the USA under variable and proportional rates of replacement

Author

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  • Bitros, George C.
  • Nadiri, M. Ishaq

Abstract

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we test two investment models of neoclassical decent. Model A is based on the conceptualization that business firms have an active replacement investment policy, which renders the replacement rate a determinant of business investment behavior, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning into a constant. The evidence that emerges from the estimations is heavily in favor of Model A on at least three grounds. Namely, first it establishes that the replacement rate is a decisive determinant of investment at all levels of aggregation; Second, it leads to estimates of investment equations with succinct short run and long run dynamics, thus facilitating policy applications; and thirdly, it gives rise to remarkably robust estimates of the elasticities of substitution of capital for labor, output and the replacement rate. When Model B is estimated for the period 1947-1960, it performs as expected, most likely because in short periods remains fairly constant due to long swings in replacement investment.

Suggested Citation

  • Bitros, George C. & Nadiri, M. Ishaq, 2017. "Behavior of business investment in the USA under variable and proportional rates of replacement," MPRA Paper 80594, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:80594
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    File URL: https://mpra.ub.uni-muenchen.de/80594/1/MPRA_paper_80594.pdf
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    References listed on IDEAS

    as
    1. Eisner, Robert & Nadiri, M Ishaq, 1970. "Neoclassical Theory of Investment Behavior: A Comment," The Review of Economics and Statistics, MIT Press, vol. 52(2), pages 216-222, May.
    2. Brown, Murray & Chang, Winston W, 1976. "Capital Aggregation in a General Equilibrium Model of Production," Econometrica, Econometric Society, vol. 44(6), pages 1179-1200, November.
    3. Paul Zarembka, 1975. "Capital Heterogeneity, Aggregation, and the Two-Sector Model," The Quarterly Journal of Economics, Oxford University Press, vol. 89(1), pages 103-114.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Neoclassical models of business investment; elasticities of substitution and output; modes of replacement investment;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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