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Econometric Issues in Estimating User Cost Elasticity

Author

Listed:
  • Schaller, Huntley

    (Department of Economics, Carleton University, Ottawa, Canada)

Abstract
The user cost elasticity is a parameter of considerable importance in economics, with implications for the effects of budget deficits, tax-based savings incentives, monetary policy, corporate taxes, and tariffs and quotas on capital goods. This paper analyzes the econometric issues that account for differences in the estimated elasticity between the two existing papers that estimate the long-run elasticity on aggregate data. The preferred estimate that results from this analysis is substantially higher than most previous estimates. The empirical evidence suggests that, when adjustment frictions are important, long-run estimates of key parameters are less biased – and the details of the econometrics matter. In particular, DOLS estimates appear less biased than the alternatives considered here. The econometric issues that are analyzed in this paper have wide-ranging implications for research areas where adjustment frictions are important, including nominal price stickiness, habit formation, and sticky information models, among others.

Suggested Citation

  • Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:194
    as

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    File URL: https://irihs.ihs.ac.at/id/eprint/1728
    File Function: First version, 2006
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    References listed on IDEAS

    as
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    Cited by:

    1. Marianna Endrész, 2011. "Business fixed investment and credit market frictions. A VECM approach for Hungary," MNB Working Papers 2011/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2011. "Fundamentals, Financial Factors, and the Dynamics of Investment in Emerging Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 88-105, May.
    3. Tuomas A. Peltonen & Ricardo M. Sousa & Isabel S. Vansteenkiste, 2009. "Asset prices, Credit and Investment in Emerging Markets," NIPE Working Papers 18/2009, NIPE - Universidade do Minho.

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    More about this item

    Keywords

    User cost elasticity; Capital stock; Investment; Adjustment frictions; Cointegration and long-run econometrics;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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