Gestation lags for capital, cash flows, and Tobins's Q
Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2005 - Business & Economics - 62 pages
"Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks"--Abstract.
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accounting measure Adam Copeland aggregate ﬁrm aggregate investment aggregate labor April assets Asymptotic normal conﬁdence Athanasios Orphanides Bank Brian Sack building horizon building lags building period Business Cycle capital accumulation capital services cash ﬂow Cobb-Douglas coefficients demand for capital dynamic effect Egon Zakrajsek elasticity Empirical equation equilibrium estimated Federal Reserve ﬁgure ﬁrm ﬁrm’s ﬁrst ﬁxed ﬂow and Q forecast error forecast error variance gestation horizon gestation lag model gestation period growth rate identiﬁcation impact impulse responses Inﬂation interest rate intervals are denoted Kydland labor supply market value measure of capital measured capital growth mismeasurement Monetary Policy normal conﬁdence intervals optimal permanent shocks planning lag productive capital growth productive capital stock proﬁt quarters rate of cash reﬂect regression shadow value signiﬁcance levels Solow residuals speciﬁcation Statistics Takeshi Kimura technology shock temporary and permanent temporary shocks Tobin’s Q unit root value of capital variable variance decompositions zero