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  • Df65v785p?file=thumbnail
    Creator: Altug, Sumru.
    Series: Working paper (Federal Reserve Bank of Minneapolis. Research Dept.)
    Number: 286
    Abstract: This paper characterizes the behavior of investment expenditures, optimal capital stocks, and real interest rates in the time-to-build model of investment. These results are used to show that the delivery lag model of investment fails to account for time lags in investment when constructing the cost of capital variable and hence, misspecifies the effects of interest rates on investment expenditures. Second, this paper derives equilibrium pricing relationships involving the prices of existing capital and uses these relationships to obtain simple tests of the underlying investment technology. Despite the widespread use of 'q' in the empirical investment literature, it is shown that the relationship between current investment and an appropriately defined measure of Tobin's 'q' contains no such testable implications. Finally, it is shown that the practice of using stock market data to measure the price of existing capital is invalid when time lags exist in the investment process.
    Keyword: Equilibrium pricing, Lag, Time lag, and Capital stocks
    Subject: E22 - Macroeconomics : Consumption, saving, production, employment, and investment - Capital ; Investment ; Capacity