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The Price of Capital Goods: A Driver of Investment Under Threat

Petia Topalova, Weicheng Lian, Natalija Novta, Yannick Timmer and Evgenia Pugacheva

No 2019/134, IMF Working Papers from International Monetary Fund

Abstract: Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

Keywords: WP; relative price; import penetration; Relative price of investment goods; trade integration; trade barriers; capital deepening; global value chain; trade cost; price of machinery; investment rate; price of capital goods; Imports; Labor productivity; Producer prices; Tariffs; Trade barriers; Global (search for similar items in EconPapers)
Pages: 36
Date: 2019-06-28
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Handle: RePEc:imf:imfwpa:2019/134