It Investment and Hicks' Composite-Good Theorem: The U.S. Experience

17 Pages Posted: 11 Aug 2003

See all articles by Jaime Marquez

Jaime Marquez

Board of Governors of the Federal Reserve System

Shing-Yi Wang

Yale University - Department of Economics

Date Written: June 2003

Abstract

We study whether aggregation residuals in U.S. private investment in information technology (IT) exhibit a predictable pattern that is consistent with Hicks' composite-good theorem and that may be used for forecasting. To determine whether one can extract such a pattern, we apply the general-to-specific strategy developed by Krolzig and Hendry (2001). This strategy combines ordinary least squares with a computer-automated algorithm that selects a specification based on coefficients' statistical significance, residual properties, and parameter constancy. Then, we derive the testable implications from Hicks' theorem and evaluate them with econometric formulations; we find qualified support for these implications. Having obtained these formulations, we evaluate their ex-post predictive accuracy and compare it to that of an autoregressive model. The key finding is that ignoring movement in relative prices results in a loss of information for predicting aggregation residuals.

Keywords: aggregation errors, Fisher aggregates, Divisia aggregate, general-to-specific

JEL Classification: C13, C43, C52, C53, E22

Suggested Citation

Marquez, Jaime and Wang, Shing-Yi, It Investment and Hicks' Composite-Good Theorem: The U.S. Experience (June 2003). Available at SSRN: https://ssrn.com/abstract=425003 or http://dx.doi.org/10.2139/ssrn.425003

Jaime Marquez (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Shing-Yi Wang

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States