Research Discussion Paper – RDP 06 Equations for Gross Business Fixed Investment Introduction

The principal aim of this paper is to explain quarterly movements in two categories of gross private fixed capital expenditure: ‘other new building and construction’, which it is convenient to refer to as construction investment; and ‘all other’, which is referred to as equipment investment. A subsidiary aim is to present and test a neo-classical theory of investment and to compare the explanatory power of this theory with that of a distributed lag accelerator theory. The Almon variable technique is used to estimate the shape of the lag relationships between investment and its determinants.

The plan of the paper is as follows. The theories of net investment and replacement investment are presented in section 2 and 3 respectively. These two parts of a theory of gross investment are drawn together in section 4. Definitions of the variables and sources of the data are given in section 5 and some comments on the Almon variable technique are made in section 6. The estimates are reported in sections 7 and 8.