The Role of ICT in the Global Investment Cycle

Bank of England Working Paper No. 257

36 Pages Posted: 19 May 2005

See all articles by Michael F. McMahon

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Gabriel Sterne

Bank of England

Jamie N.R. Thompson

Bank of England

Date Written: March 2005

Abstract

Most macroeconomic forecasters underestimated global investment during the late 1990s. One potential reason was that the models they were using were insufficiently disaggregated. In this paper, an empirical model is estimated whose out-of-sample forecasts largely predicted the global investment boom of the late 1990s. The main factor behind the improved model performance is the distinction between investment in ICT assets and investment in other assets, using disaggregated investment data provided by the OECD. In line with previous studies on US and UK investment performance, ICT investment is estimated to be much more responsive to changes in the real user cost of capital. In particular, panel and seemingly unrelated regression (SUR) estimates suggest very strong relative price effects on ICT investment for all G7 countries and Australia. The data also allow an examination of the effects of possible deflator mismeasurement; but within our framework, the measurement of investment using harmonised, rather than national, deflators is not found to have a material impact on forecasting performance.

Keywords: Investment, ICT, panel econometrics, G7

JEL Classification: E22, E27, C33

Suggested Citation

McMahon, Michael F. and Sterne, Gabriel and Thompson, Jamie N.R., The Role of ICT in the Global Investment Cycle (March 2005). Bank of England Working Paper No. 257. Available at SSRN: https://ssrn.com/abstract=724082 or http://dx.doi.org/10.2139/ssrn.724082

Michael F. McMahon

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Gabriel Sterne

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jamie N.R. Thompson (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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