Three essays on investment

Abstract

This dissertation studies the supply and demand of capital goods, and the effects of investment tax incentives. Chapter II examines the effects of investment tax incentives. The evidence indicates that subsidies increase capital goods purchases more than domestic production so investment subsidies also stimulate foreign capital goods producers. At capital producing firms, measures of economic increase substantially following an investment tax subsidy. The data is used to estimate the key parameters of a multi-sector, open-economy DSGE model with capita and labor adjustment costs. In the estimated model, investment tax incentives are strong enough to cause noticeable changes in aggregate economic activity. The import supply elasticity is considerable, allowing investment to rise even in the short-run in response to investment subsidies. Chapter III develops an equilibrium model of investment with retiming costs at the micro-level. In the benchmark case in which investment retiming costs are zero, this model and standard fixed-costs models generate virtually identical aggregate predictions. If the timing adjustment costs are positive, then capital goods prices may exhibit predictable changes over time. Simulated impulse responses in the quantitative model are then used to analyze the effects of retiming costs on the effectiveness of investment of tax subsidies, the economy’s reaction to transitory investment supply shocks, and an out-of-steady state distribution of capital vintages. In the presence of retiming costs, temporary subsidies are less effective and cause a fall in investment after they expire. Additionally, investment supply shocks have an attenuated effect of investment relative to the benchmark case. Chapter IV studies the supply of capital goods. The data indicate that for equipment, the elasticity of investment supply is considerable, while for structures the elasticity of investment supply is close to unity. After calibrating the elasticity of investment supply, investment supply shocks are recovered for each capital type. Using a mix of reduced-form and structural time-series techniques, the structural parameters of the permanent and transitory components for each series are estimated from the data. The analysis suggests that permanent shocks are more prominent than transitory shocks and that the permanent and transitory components are strongly negatively correlated.