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Modelling Investment When Relative Prices Are Trending: Theory and Evidence for the UK

Author

Listed:
  • Thompson, Jamie

    (Bank of England)

  • Hasan Bakhshi
  • Nick Oulton

Abstract

This paper investigates the ability of aggregate and disaggregate equations to account for the boom in UK plant and machinery investment in the second half of the 1990s. We extend previous US research by Tevlin and Whelan (2002) by explaining the failure of the aggregate equations more formally in terms of misspecification when relative prices are trending; and by conducting the econometric analysis in a formal cointegration framework. In line with the US research, we find asset-level equations can explain the UK investment boom over this period, whereas the aggregate equation completely fails.

Suggested Citation

  • Thompson, Jamie & Hasan Bakhshi & Nick Oulton, 2003. "Modelling Investment When Relative Prices Are Trending: Theory and Evidence for the UK," Royal Economic Society Annual Conference 2003 203, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:203
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    Citations

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    Cited by:

    1. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    2. Susanto Basu & John G. Fernald, 2008. "Information and communications technology as a general purpose technology: evidence from U.S. industry data," Economic Review, Federal Reserve Bank of San Francisco, pages 1-15.
    3. Paolo Lucchino & Dr Justin van de Ven, 2013. "Modelling the dynamic effects of transfer policy: the LINDA policy analysis tool," National Institute of Economic and Social Research (NIESR) Discussion Papers 405, National Institute of Economic and Social Research.
    4. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo.
    5. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2004. "The Case of the Missing Productivity Growth, or Does Information Technology Explain Why Productivity Accelerated in the United States but Not in the United Kingdom?," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 9-82, National Bureau of Economic Research, Inc.
    6. Colin Ellis & Simon Price, 2003. "UK business investment: long-run elasticities and short-run dynamics," Bank of England working papers 196, Bank of England.
    7. Simon Price, 2004. "UK investment and the return to equity: Q redux," Money Macro and Finance (MMF) Research Group Conference 2004 87, Money Macro and Finance Research Group.
    8. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information Technology Explain why Productivity Accelerated in the US but not the UK?," NBER Working Papers 10010, National Bureau of Economic Research, Inc.
    9. Rebecca Riley, 2013. "Modelling Demand for Low Skilled/Low Paid Labour: Exploring the Employment Trade-Offs of a Living Wage," National Institute of Economic and Social Research (NIESR) Discussion Papers 404, National Institute of Economic and Social Research.
    10. Lynne Cockerell & Steven Pennings, 2007. "Private Business Investment in Australia," RBA Research Discussion Papers rdp2007-09, Reserve Bank of Australia.
    11. Fatica, Serena, 2018. "Business capital accumulation and the user cost: Is there a heterogeneity bias?," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 15-34.
    12. Michael McMahon & Gabriel Sterne & Jamie Thompson, 2005. "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England.
    13. Rebecca Riley, 2013. "Modelling Demand for Low Skilled/Low Paid Labour: Exploring the Employment Trade-Offs of a Living Wage," National Institute of Economic and Social Research (NIESR) Discussion Papers 404, National Institute of Economic and Social Research.
    14. Mr. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 2006/152, International Monetary Fund.
    15. repec:bla:germec:v:8:y:2007:i::p:146-173 is not listed on IDEAS
    16. Elena Crivellaro & Aikaterini Karadimitropoulou, 2019. "The role of financial constraints on labour share developments: macro- and micro-level evidence," Working Papers 257, Bank of Greece.
    17. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).

    More about this item

    Keywords

    investment; computers; relative prices;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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