Econometric Issues in Estimating User Cost Elasticity

Huntley Schaller

No 194, Economics Series from Institute for Advanced Studies

Abstract: The user cost elasticity is a parameter of considerable importance in economics, with implications for the effects of budget deficits, tax-based savings incentives, monetary policy, corporate taxes, and tariffs and quotas on capital goods. This paper analyzes the econometric issues that account for differences in the estimated elasticity between the two existing papers that estimate the long-run elasticity on aggregate data. The preferred estimate that results from this analysis is substantially higher than most previous estimates. The empirical evidence suggests that, when adjustment frictions are important, long-run estimates of key parameters are less biased – and the details of the econometrics matter. In particular, DOLS estimates appear less biased than the alternatives considered here. The econometric issues that are analyzed in this paper have wide-ranging implications for research areas where adjustment frictions are important, including nominal price stickiness, habit formation, and sticky information models, among others.

Keywords: User cost elasticity; Capital stock; Investment; Adjustment frictions; Cointegration and long-run econometrics (search for similar items in EconPapers)
JEL-codes: E22 E44 H25 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://irihs.ihs.ac.at/id/eprint/1728 First version, 2006 (application/pdf)

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