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Quantifying UK Capital Adjustment Costs

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  • CHARLOTTA GROTH

Abstract

This paper estimates UK capital adjustment costs, using manufacturing and service industry data for 1970–2000. There is evidence of significant adjustment costs, with a 1% increase in investment reducing value added by 0.05%. This implies an elasticity of investment with respect to Tobin's q of 2.5, and a convergence time for capital of 12 years. The results suggest that adjustment costs may have caused half of the slowdown in UK total factor productivity (TFP) growth during the second half of the 1990s. The impact is larger than that reported for the United States, reflecting larger adjustment costs and higher investment growth.

Suggested Citation

  • Charlotta Groth, 2008. "Quantifying UK Capital Adjustment Costs," Economica, London School of Economics and Political Science, vol. 75(298), pages 310-325, May.
    • Handle: RePEc:bla:econom:v:75:y:2008:i:298:p:310-325
    DOI: 10.1111/j.1468-0335.2007.00622.x
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    Cited by:

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    2. Robert S. Chirinko & Debdulal Mallick, 2008. "The Marginal Product of Capital: A Persistent International Puzzle," CESifo Working Paper Series 2399, CESifo.
    3. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions," IMF Working Papers 2016/138, International Monetary Fund.
    4. Eleni Angelopoulou & Sarantis Kalyvitis, 2012. "Estimating the Euler Equation for Aggregate Investment with Endogenous Capital Depreciation," Southern Economic Journal, John Wiley & Sons, vol. 78(3), pages 1057-1078, January.
    5. René Belderbos & Kyoji Fukao & Keiko Ito & Wilko Letterie, 2013. "Global Fixed Capital Investment by Multinational Firms," Economica, London School of Economics and Political Science, vol. 80(318), pages 274-299, April.
    6. Charlotta Groth & Hashmat Khan, 2007. "Investment adjustment costs: evidence from UK and US industries," Bank of England working papers 332, Bank of England.
    7. Hashmat Khan & John Tsoukalas, 2011. "Effects of Productivity Shocks on Employment: UK Evidence (revised 25 February 2013)," Carleton Economic Papers 11-05, Carleton University, Department of Economics, revised 25 Feb 2013.
    8. Elisa Lanzi & Ian Sue Wing, 2013. "Capital Malleability, Emission Leakage and the Cost of Partial Climate Policies: General Equilibrium Analysis of the European Union Emission Trading System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 55(2), pages 257-289, June.

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