Ex Post versus Ex Ante Measures of the User Cost of Capital

23 Pages Posted: 24 May 2007

See all articles by Nicholas Oulton

Nicholas Oulton

London School of Economics - Centre for Macroeconomics(CFM)

Abstract

Should we use ex post or ex ante measures of user costs to calculate the contribution of capital in a growth accounting exercise? The answer, based on a simple model of temporary equilibrium, is that ex post is better in theory. In practice researchers usually calculate ex post user costs by assuming that the rate of return is equalized across assets. But this is only true if expectations are correct. In general, the ex post rate of return differs between assets, even though ex ante it is the same. I propose a hybrid method. The index of capital services is estimated using ex ante weights; the contribution of capital is the growth of this index multiplied by the ex post income share of capital. I show that this method is theoretically correct if the production function is CES. I compare the ex post, ex ante and hybrid methods using data for 31 U.K. industries from 1970 to 2000.

Suggested Citation

Oulton, Nicholas, Ex Post versus Ex Ante Measures of the User Cost of Capital. Review of Income and Wealth, Vol. 53, No. 2, pp. 295-317, June 2007, Available at SSRN: https://ssrn.com/abstract=988586 or http://dx.doi.org/10.1111/j.1475-4991.2007.00232.x

Nicholas Oulton (Contact Author)

London School of Economics - Centre for Macroeconomics(CFM) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://ideas.repec.org/e/pou3.html

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