Profitability, Capacity, and Uncertainty: A Robust Model of UK Manufacturing Investment

Ciaran Driver, Paul Temple and Giovanni Urga

No 66, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: This paper uses a model of capital investment that ascribes a theoretical role to profitability and uncertainty in determining the capital-output ratio. Empirical implementation uses quarterly data from UK manufacturing over a thirty-year period, and unique co-integrating relationships are obtained for two asset classes: buildings and plant and machinery. The corresponding dynamic equations are also well specified. Non-nested testing shows that the performance of the estimated investment models ranks similarly to the performance of predictions from direct investment intentions.

Date: 2002-08-29
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