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Bayesian Estimation of a Dynamic Partial-Equilibrium Model for Investment

  • Matthias Kredler

    (New York University)

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.

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Paper provided by EconWPA in its series Econometrics with number 0509003.

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Length: 23 pages
Date of creation: 02 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpem:0509003
Note: Type of Document - pdf; pages: 23
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  1. 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.
  2. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  5. 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.
  6. Bernanke, Ben S, 1983. "The Determinants of Investment: Another Look," American Economic Review, American Economic Association, vol. 73(2), pages 71-75, May.
  7. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
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