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

Bitros, George C. and Nadiri, M. Ishaq (2017): Behavior of business investment in the USA under variable and proportional rates of replacement.

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 a determinant of business investment behavior, whereas Model B is based on the traditional hypothesis that replacement investment is an engineering proportion of the capital stock, thus turning 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 investment 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 remains fairly constant due to long swings in replacement investment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Neoclassical models of business investment, elasticities of substitution and output, modes of replacement investment
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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