Finance and Economics Discussion Series (FEDS)
March 2000
Explaining the Investment Boom of the 1990s
Stacey Tevlin and Karl Whelan
Abstract:
Real equipment investment in the United States has boomed in recent years, led by soaring investment in computers. We find that traditional aggregate econometric models completely fail to capture the magnitude of this recent growth--mainly because these models neglect to address two features that are crucial (and unique) to the current investment boom. First, the pace at which firms replace depreciated capital has increased. Second, investment has been more sensitive to the cost of capital. We document that these two features stem from the special behavior of investment in computers and therefore propose a disaggregated approach. This produces an econometric model that successfully explains the 1990s equipment investment boom.
Full paper (855 KB Postscript)Keywords: Investment, cost of capital, depreciation, computers
PDF: Full Paper
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