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Interpreting estimation results of Euler equation investment models when factor markets are imperfectly competitive

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  • Janz, Norbert

Abstract

In this paper the standard Euler equation investment model with imperfectly competitive product markets is extended for imperfectly competitive structures on the factor markets: labour markets and markets for investment goods. This extension leads to two additional explanatory variables in the Euler equation. Although economically reasonable, the resulting equation for a simple reason cannot be estimated: parts of the explanatory variables are perfectly collinear. For estimation purposes at least one of these variables has to be neglected. Neglecting one of the additional variables, the coefficients to be estimated have to be interpreted as linear combinations of the 'true' coefficients. The differences between the 'true' coefficients and the linear combinations are numerically demonstrated.

Suggested Citation

  • Janz, Norbert, 1997. "Interpreting estimation results of Euler equation investment models when factor markets are imperfectly competitive," ZEW Discussion Papers 97-29, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5131
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    References listed on IDEAS

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    1. Chow, G.C., 1991. "Dynamic Optimization Without Dynamic Programming," Papers 361, Princeton, Department of Economics - Econometric Research Program.
    2. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 197-222.
    3. Chow, Gregory C., 1992. "Dynamic optimization without dynamic programming," Economic Modelling, Elsevier, vol. 9(1), pages 3-9, January.
    4. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    5. Chow, G.C., 1992. "Optimal Control Without Solving the Bellman Equations," Papers 364, Princeton, Department of Economics - Econometric Research Program.
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    More about this item

    Keywords

    Firm Investment Behaviour; Euler Equation Model;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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