 UK Business Investment and the User Cost of CapitalColin Ellis and Simon Price Manchester School, 2004, vol. 72, issue s1, 72-93 Abstract: Theory tells us that output, the capital stock and the user cost of capital are related. From the capital accumulation identity, it also follows that the capital stock and investment have a long‐run proportional relationship. The dynamic structure thus implies a multicointegrating framework, in which separate cointegrating relationships are identifiable. This has been used to justify the estimation of investment equations embodying a reduced‐form long‐run relationship between investment and output (rather than between the capital stock and output). In this paper, a new investment equation is estimated in the full structural framework, exploiting a measure of the capital stock constructed by the Bank, and a long series for the cost of capital. A constant elasticity of substitution production function is assumed, and a well‐determined estimate of the elasticity of substitution is obtained by a variety of measures. The robust result is that the elasticity of substitution is significantly different from unity (the Cobb–Douglas case), at about 0.45. Overidentifying restrictions on the long‐run relationship are all accepted. Thus there is strong evidence for a significant effect from the user cost of capital. Date: 2004 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:manchs:v:72:y:2004:i:s1:p:72-93 Ordering information: This journal article can be ordered from Access Statistics for this article Manchester School is currently edited by Keith Blackburn More articles in Manchester School from University of Manchester Contact information at EDIRC. |
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