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The dynamics of investment and labour demand: Theoretical issues and an application to the Dutch manufacturing industry

Franz Palm, Marga Peeters () and Gerard Pfann ()

MPRA Paper from University Library of Munich, Germany

Abstract: Lucas' (1967) adjustment costs model and Kydland and Prescott's (1982) time-to-build model induce mutually exclusive time-series properties that can be recovered from data. This paper investigates three variants of a theoretical model which give insight into the parameter restrictions implied by each of the two sources of dynamics separately. The variants, which simultaneously determine the interrelated demand for capital structures, equipment and labour, are analyzed using quarterly Dutch manufacturing data for the period 1971-1990. In a model with gestation lags, the additional dynamics induced by adjustment costs are not significant. This is not surprising since the economic interpretation of adjustment costs in addition to time-to-build is not obvious. Non-nested hyotheses tests, however, show that the two specifications imply mutually exclusieve time series properties which are statistically significant.

Keywords: time-to-build; adjustment costs; capital; labour (search for similar items in EconPapers)
JEL-codes: D92 (search for similar items in EconPapers)
Date: 1993-09
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