Elasticities of Business Investment in the U.S. and Their Policy Implications: A Disaggregate Approach to Modeling and Estimation

32 Pages Posted: 15 Jul 2017

See all articles by Georgios (George) C. Bitros

Georgios (George) C. Bitros

Athens University of Economics and Business - Department of Economics

M. Ishaq Nadiri

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 8, 2017

Abstract

Using data from the U. S. Bureau of Economic Analysis for the period 1947-2015, we estimate investment equations for three types of fixed assets and three policy instruments. In particular, we disaggregate investment into structures, equipment and intangibles, and the policy instruments into the rates of replacement, interest and taxes. Additionally, we estimate an equation for total investment. At the aggregate level the long run elasticities of investment with respect to output and the user cost are found to vary narrowly around 0.83; the direct elasticities of investment with respect to the rates of replacement, interest and taxation are 0.91, -0.04 and -0.23, whereas the indirect and inversely additive ones through the user cost are -0.11, -0.05 and -0.27, respectively. To highlight the significance of these findings, we investigate their implications for economic growth by focusing on four policy channels, i.e. aggregate demand, relative prices, and monetary and fiscal policies. We conclude that monetary policy may be weak to stimulate investment, and even fall into the trap of the law of unintended consequences by slowing replacement investment down, since the average age of capital is related negatively to the discount rate. On the contrary fiscal policy is relatively more potent as a 10% reduction in the expected effective tax rate is found to boost investment directly and indirectly by as much as 5%. In general, first best policies would aim at increasing the replacement rate, particularly of intangibles and equipment in the same order.

Keywords: Business investment, elasticities, economic policies, composition of the capital stock, economic growth

JEL Classification: E22, E52, E62

Suggested Citation

Bitros, Georgios (George) C. and Nadiri, M. Ishaq, Elasticities of Business Investment in the U.S. and Their Policy Implications: A Disaggregate Approach to Modeling and Estimation (July 8, 2017). Available at SSRN: https://ssrn.com/abstract=2999105 or http://dx.doi.org/10.2139/ssrn.2999105

Georgios (George) C. Bitros

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
Athens, 10434
Greece
030 210 8203740 (Phone)
030 210 8070545 (Fax)

M. Ishaq Nadiri (Contact Author)

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
212-998-8968 (Phone)
212-995-4013 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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