Behavior of business investment in the USA under variable and proportional rates of replacement

George Bitros () and M. Ishaq Nadiri
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M. Ishaq Nadiri: Athens University of Economics and Business

No 201708, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we test two investment models of neoclassical decent. Model A is based on the conceptualization that business firms have an active replacement investment policy, which renders the replacement rate d a determinant of business investment behavior r, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning d into a constant. The evidence that emerges from the estimations is heavily in favor of Model A on at least three grounds. Namely, first it establishes that the replacement rate is a decisive determinant of in - vestment at all levels of aggregation; Second, it leads to estimates of investment equations with succinct short run and long run dynamics, thus facilitating policy applications; and thirdly, it gives rise to remarkably robust estimates of the elasticities of substitution of capital for labor, output and the replacement rate. When Model B is estimated for the period 1947-1960, it performs as expected, most likely because in short periods d remains fairly constant due to long swings in re placement investment.

Keywords: Neoclassical models of business investment; elasticities of substitution and output; modes of replacement investment. (search for similar items in EconPapers)
JEL-codes: E22 E52 E62 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-08
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Citations: View citations in EconPapers (3)

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