Pitfalls in Investment Euler Equations

Jean-Bernard Chatelain and J.-C. Teurlai

Working papers from Banque de France

Abstract: This paper investigates three pitfalls concerning the test of the Euler equation facing quadratic adjustment costs and perfect capital markets on a large balanced panel data of 4025 french firms. First, the quadratic parameterization of adjustment costs is too restrictive, and power series approximations of adjustment costs are tested. Second, we isolate firms whose optimal Euler condition is not altered even in the presence of fixed adjustment costs. Third, we identify instruments which contribute to model failure via standard GMM\ tests. These methods point that financial instruments contribute to reject strongly the standard model, which shows that it is misspecified.

Keywords: Investment; adjustment costs; financial constraints; generalized method of moments. (search for similar items in EconPapers)
JEL-codes: C23 D21 D92 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2001
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Citations: View citations in EconPapers (13)

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Journal Article: Pitfalls in investment Euler equations (2001)
Working Paper: Pitfalls in Investment Euler Equations (2001)
Working Paper: Pitfalls in Investment Euler Equations (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:81

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