It Investment and Hicks' Composite-Good Theorem: The U.S. Experience
17 Pages Posted: 11 Aug 2003
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: Suggested Citation
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