Bayesian Estimation of a Dynamic Partial-Equilibrium Model for Investment
This paper revisits the question if the user cost of capital plays an important role for investment decisions using Bayesian estimation techniques. These methods offer advantages over classical econometric tools in this area: The most important are that prior distributions offer a convincing way to confine the support of model parameters and that confidence intervals are more reliable when model parameters approach the bounds of their support. I use aggregate investment data from six industrial sectors in the UK to estimate a parsimonious partial-equilibrium model. The Kalman Filter is used to evaluate the likelihood and MCMC methods are employed to draw from the posterior distribution. The main finding is that the real interest rate accounts for less than 10 percent of the variance in investment under the 99- percent confidence level; this result is robust across sectors.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abel, Andrew B & Eberly, Janice C, 1994.
"A Unified Model of Investment under Uncertainty,"
American Economic Review,
American Economic Association, vol. 84(5), pages 1369-84, December.
- Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
- Fumio Hayashi, 1981.
"Tobin's Marginal q and Average a : A Neoclassical Interpretation,"
457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
- Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2004.
"Estimating Dynamic Equilibrium Economies: Linear versus Nonlinear Likelihood,"
PIER Working Paper Archive
04-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Juan F. Rubio-Ramirez & Jesus Fernández-Villaverde, 2005. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 891-910.
- Jesús Fernández-Villaverde & Juan Francisco Rubio-Ramírez, 2004. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," FRB Atlanta Working Paper 2004-3, Federal Reserve Bank of Atlanta.
- Ricardo J. Caballero, 1997.
NBER Working Papers
6264, National Bureau of Economic Research, Inc.
- David Barr & John Campbell, .
"Inflation, real interest rates and the bond market: a study of UK nominal and index-linked Government bond prices,"
CERF Discussion Paper Series
95-09, Economics and Finance Section, School of Social Sciences, Brunel University.
- Barr, David & Campbell, John, 1997. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," Scholarly Articles 3163261, Harvard University Department of Economics.
- David G. Barr & John Y. Campbell, 1996. "Inflation, Real Interest Rates, and the Bond Market: A Study of UK Nominal and Index-Linked Government Bond Prices," NBER Working Papers 5821, National Bureau of Economic Research, Inc.
- Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
- Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpem:0509003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.