Empirical evidence on the Euler equation for investment in the US

54 Pages Posted: 2 Aug 2021

See all articles by Guido Ascari

Guido Ascari

University of Oxford; De Nederlandsche Bank; Centre for Economic Policy Research (CEPR)

Qazi Haque

University of Adelaide

Leandro M. Magnusson

University of Western Australia

Sophocles Mavroeidis

University of Oxford - Department of Economics

Multiple version iconThere are 2 versions of this paper

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

Ascari, Guido and Haque, Qazi and Magnusson, Leandro M. and Mavroeidis, Sophocles, Empirical evidence on the Euler equation for investment in the US (July 28, 2021). CAMA Working Paper No. 65/2021, Available at SSRN: https://ssrn.com/abstract=3894698 or http://dx.doi.org/10.2139/ssrn.3894698

Guido Ascari

University of Oxford ( email )

De Nederlandsche Bank ( email )

Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Qazi Haque (Contact Author)

University of Adelaide ( email )

School of Economics, Faculty of the Professions
Nexux 10, 10 Pulteney Street
Adelaide, South Australia 5005
Australia

HOME PAGE: http://https://sites.google.com/site/qazigmziaulhaque/

Leandro M. Magnusson

University of Western Australia ( email )

35 Stirling Highway, M251
Crawley, WA 6009
Australia
+61 8 6488 2924 (Phone)
+61 8 6488 1016 (Fax)

HOME PAGE: http://www.uwa.edu.au/people/Leandro.Magnusson

Sophocles Mavroeidis

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/sophoclesmavroeidis/

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