Econometric Issues in Estimating User Cost Elasticity

Schaller, Huntley (September 2006) Econometric Issues in Estimating User Cost Elasticity. Former Series > Working Paper Series > IHS Economics Series 194


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Abstract: The user cost elasticity is a parameter of considerable importance in economics, with implications for the effects of budget deficits, tax-based savings incentives, monetary policy, corporate taxes, and tariffs and quotas on capital goods. This paper analyzes the econometric issues that account for differences in the estimated elasticity between the two existing papers that estimate the long-run elasticity on aggregate data. The preferred estimate that results from this analysis is substantially higher than most previous estimates. The empirical evidence suggests that, when adjustment frictions are important, long-run estimates of key parameters are less biased - and the details of the econometrics matter. In particular, DOLS estimates appear less biased than the alternatives considered here. The econometric issues that are analyzed in this paper have wide-ranging implications for research areas where adjustment frictions are important, including nominal price stickiness, habit formation, and sticky information models, among others.;

Item Type: IHS Series
Keywords: 'User cost elasticity' 'Capital stock' 'Investment' 'Adjustment frictions' 'Cointegration and long-run econometrics'
Classification Codes (e.g. JEL): E22, E44, H25
Date Deposited: 26 Sep 2014 10:38
Last Modified: 27 Sep 2019 06:04
ISBN: 1605-7996

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