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Private Business Investment in Australia

  • Lynne Cockerell

    (Reserve Bank of Australia)

  • Steven Pennings

    (Reserve Bank of Australia)

Registered author(s):

    The behaviour of aggregate Australian private business investment has attracted relatively little attention in the literature over the past decade or so, probably reflecting the well-known difficulties associated with modelling it. This paper reviews the main drivers of Australian business investment through a discussion of some long- and short-run trends and estimation of error-correction models for its main components. Two innovations are introduced in the modelling approach. The first is that investment in computing equipment is excluded from the models, recognising that it cannot be treated in the same way as other types of investment, particularly in light of the dramatic falls in its relative price over recent decades. The second is that standard techniques are used to exclude influential observations when modelling the short-run variation in the data as a means of accounting for the considerable volatility in these variables. This improves the robustness of the estimation. The different types of investment – equipment, building and engineering – are found to be influenced by their own idiosyncratic factors, though for each type of investment, an inverse relationship between the investment-to-output ratio and its corresponding measure of the cost of capital is found.

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    File URL: http://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-09.pdf
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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2007-09.

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    Date of creation: Sep 2007
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    Handle: RePEc:rba:rbardp:rdp2007-09
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    1. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
    2. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    3. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
    4. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
    5. Malcolm L. Edey & Elaine J. Kerrison & Gordon D. Menzies, 1987. "Transmission of External Shocks in the RBII Model," RBA Research Discussion Papers rdp8710, Reserve Bank of Australia.
    6. 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.
    7. Robert J. Gordon, 2001. "Response from Robert J. Gordon," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 258-259, Summer.
    8. Tevlin, Stacey & Whelan, Karl, 2003. " Explaining the Investment Boom of the 1990s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 1-22, February.
    9. Barnes, Sebastian & Price, Simon & Sebastia Barriel, Maria, 2008. "The elasticity of substitution: evidence from a UK firm-level data set," Bank of England working papers 348, Bank of England.
    10. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
    11. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-26, August.
    12. 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.
    13. Schaller, Huntley, 2006. "Estimating the long-run user cost elasticity," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 725-736, May.
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