Panel Cointegration Estimates of the Effect of Interest Rates, Capital Goods Prices, and Taxes on the Capital Stock

38 Pages Posted: 19 Mar 2007

See all articles by Huntley Schaller

Huntley Schaller

Carleton University - Department of Economics

Marcel C. Voia

Carleton University

Date Written: December 22, 2006

Abstract

The effect of interest rates, capital goods prices, and taxes on the capital stock is an issue of central importance in economics, with implications for monetary policy, business cycle models, tax policy, economic development, growth, and other areas. For more than 30 years it has been difficult to obtain precise estimates of these effects, and there is little consensus in the profession on their magnitude, despite their importance for both theory and policy. In this paper, we therefore turn to panel data, specifically a newly constructed data set with more than 50 years of firm-level data on the capital stock and with detailed industry-specific data on the interest rate, the price of investment goods, and tax parameters. Using this rich panel data set, we implement recently developed tests for cointegration in panel data. These tests allow us to determine whether the long-run implications of Jorgensonian neoclassical, q, irreversibility, and (s,S) theories are supported by the data. Using the same data, we then use recently developed panel cointegration estimators to assess the quantitative effect of the interest rate, capital goods prices, and taxes on the capital stock.

Keywords: investment, capital stock, user cost elasticity, interest rate, taxes, capital goods prices, panel cointegration

JEL Classification: H25,C23,E22,E62

Suggested Citation

Schaller, Huntley and Voia, Marcel C., Panel Cointegration Estimates of the Effect of Interest Rates, Capital Goods Prices, and Taxes on the Capital Stock (December 22, 2006). Available at SSRN: https://ssrn.com/abstract=972708 or http://dx.doi.org/10.2139/ssrn.972708

Huntley Schaller

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada
613-520-3751 (Phone)
613-520-3906 (Fax)

Marcel C. Voia (Contact Author)

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

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