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UK Business Investment: Long-Run Elasticities and Short-Run Dynamics

Author

Listed:
  • Ellis, Colin

    (Bank of England)

  • Simon Price

Abstract

From neoclassical theory output, capital stock and the user cost are cointegrated; capital and investment also (multi)cointegrate through the capital accumulation identity. An investment equation is estimated on UK data using a new capital stock series and a long series for the weighted cost of capital. Assuming CES technology, the elasticity of substitution is well-determined and below unity. Over-identifying restrictions are accepted. The long-run parameter is robust to alternative specifications, but single-equation investment relationships may obscure the dynamics. The Johansen method is over-sized, but outperforms a single equation test for excluding the capital accumulation identity from the investment equation.

Suggested Citation

  • Ellis, Colin & Simon Price, 2003. "UK Business Investment: Long-Run Elasticities and Short-Run Dynamics," Royal Economic Society Annual Conference 2003 73, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:73
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    Cited by:

    1. Björn A. Hauksson, 2005. "Aggregate business fixed investment," Economics wp27_bjorn, Department of Economics, Central bank of Iceland.
    2. Stephen Millard & John Power, 2004. "The effects of stock market movements on consumption and investment: does the shock matter?," Bank of England working papers 236, Bank of England.
    3. Eman Moustafa, . "The relationship between perceived corruption and FDI: a longitudinal study in the context of Egypt," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.
    4. 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.
    5. Smith, James, 2008. "That elusive elasticity and the ubiquitous bias: Is panel data a panacea?," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 760-779, June.
    6. Lydon, Reamonn & Scally, John, 2014. "Trends in Business Investment," Quarterly Bulletin Articles, Central Bank of Ireland, pages 76-89, January.
    7. Lukasz Rachel & Thomas D. Smith, 2017. "Are Low Real Interest Rates Here to Stay?," International Journal of Central Banking, International Journal of Central Banking, vol. 13(3), pages 1-42, September.

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    More about this item

    Keywords

    investment; capital stock; identification; multicointegration;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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