Aggregate business fixed investment

Abstract

An aggregate business fixed investment error correction model (ECM) is estimated with Icelandic data. The user cost of capital increased considerably in the 1980s as capital markets in Iceland were liberalised and interest rates were adjusting. From the 1990s and onwards, however, the user cost has been decreasing steadily. And the relative price of business investment has been downward trending since the 1980s. A high Q ratio over the period portrays an increased demand for capital. The first order condition of capital for profits which is derived for a constant elasticity of substitution production function has minor long-run role for the user cost. Investment and capital, and investment, value added and the user cost do, however, give expected estimates of cointegration coefficients. In the short-run dynamics of the ECM, gearing, Q and profit ratios move with investment. Official figures show an unprecedented capital decrease in the 1990s in Iceland. The possibility of mismeasured technology investment is explored briefly.