Macroeconometrics of investment and the user cost of capital

Thethach Chuaprapaisilp, Fordham University


The dissertation develops a general equilibrium macroeconometric model to estimate the long-run user cost elasticity of business investment that is commonly discussed in the macro investment literature. The user cost elasticity measures the responsiveness of a representative firm's desired level of capital stock (hence its investment in a given period) to the change in its user cost of capital. The notion of the cost of capital being used is that of Jorgenson (1963) where the user cost is the real rental price of capital services or the after-tax costs of holding capital (interest/opportunity cost of finance plus depreciation cost less capital gain) over a given period. The user cost elasticity is also equivalent to the underlying elasticity of substitution between capital and labor for the constant elasticity of substitution (CES) production function. ^ Structural cointegrated vector autoregression (CVAR) methodologies, as described in Garratt et al. (2006) and Juselius (2006), are employed based on a set of theoretically consistent long-run relationships among macroeconomic variables. A small system of log-linearized equations that represents a general equilibrium economy with investment over the long run is derived and estimated. The model is further extended to incorporate a technological trend in production and investment associated with research and development capital. ^ The estimation results provide evidence that the user cost capital is endogenous to the general equilibrium system and responses to macroeconomic shocks including external and policy shocks. Net exports are also endogenous to the firm's investment decision and can produce an upward bias to the estimated user cost elasticity of around one percentage point due to equilibrium current account adjustments when compared with the benchmark user cost elasticity of around −0.7 to −1.1. The endogeneity of the user cost of capital that is influenced by domestic supply and demand for capital in a large open economy also produces a smaller user cost elasticity by around half a percentage point. Thus the dissertation addresses the issue of wide-ranging user cost elasticity estimates obtained in the literature and provides some guidance for future research. ^

Subject Area

Economics, Commerce-Business|Economics, Finance

Recommended Citation

Chuaprapaisilp, Thethach, "Macroeconometrics of investment and the user cost of capital" (2009). ETD Collection for Fordham University. AAI3377041.