Empirical evidence on the Euler equation for investment in the US
54 Pages Posted: 2 Aug 2021
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Empirical evidence on the Euler equation for investment in the US
Empirical Evidence on the Euler Equation for Investment in the US
Date Written: July 28, 2021
Abstract
The Euler equation model for investment with adjustment costs and variable capital utilization is estimated using aggregate US post-war data with econometric methods that are robust to weak instruments and exploit information in possible structural changes. Various alternative identification assumptions are considered, including external instruments, and instruments obtained from Dynamic Stochastic General Equilibrium models. Results show that the elasticity of capital utilization and investment adjustment cost parameters are very weakly identified. This is because investment appears to be unresponsive to changes in capital utilization and the real interest rate.
Keywords: Investment, Adjustment costs, Weak identification
JEL Classification: C2, E22
Suggested Citation: Suggested Citation