The Price of Capital Goods: A Driver of Investment Under Threat

37 Pages Posted: 20 Jul 2019

See all articles by Weicheng Lian

Weicheng Lian

International Monetary Fund (IMF)

Natalija Novta

International Monetary Fund (IMF)

Evgenia Pugacheva

International Monetary Fund (IMF)

Yannick Timmer

International Monetary Fund (IMF) - Research Department; International Monetary Fund (IMF) - Financial Studies Division

Petia B. Topalova

International Monetary Fund (IMF)

Date Written: June 2019

Abstract

Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

Keywords: Real interest rates, Producer prices, Economic integration, Capital goods, Low-income developing countries, Relative price of investment goods, trade integration, trade barriers, capital deepening, global value chain, relative price, investment rate, trade cost, real investment, producer price

JEL Classification: F10, F40, E31, O40, E01, F13, L11, O24, F15

Suggested Citation

Lian, Weicheng and Novta, Natalija and Pugacheva, Evgenia and Timmer, Yannick and Topalova, Petia B., The Price of Capital Goods: A Driver of Investment Under Threat (June 2019). IMF Working Paper No. 19/134. Available at SSRN: https://ssrn.com/abstract=3423370

Weicheng Lian (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Natalija Novta

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Evgenia Pugacheva

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yannick Timmer

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Petia B. Topalova

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

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