Economics Letters 69 2000 289–297
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Co-integration inference in the value–profit relation and investment models
a,b ,
´ ´ Frederic Verschueren
a
´ ´
ARPEGE , Facultes Universitaires Catholiques de Mons, 151 Chaussee de Binche, B-7000 Mons, Belgium
b
´ GREMARS
, Universite Charles de Gaulle Lille III, BP 149, F-59653 Villeneuve d’Ascq Cedex, France Received 11 August 1999; received in revised form 25 April 2000; accepted 25 April 2000
Abstract
In this paper we make use of the co-integration property in a present value model to obtain long run specifications for investment within a neoclassical framework with adjustment cost technology. These attractive
theoretical models are implemented for eleven OECD countries.
2000 Elsevier Science S.A. All rights reserved.
Keywords : Present value model; Co-integration; Investment
JEL classification : C22; E22
1. Introduction
Since the beginning of this century much research work has been dedicated to understanding and modelling investment behaviour, producing an abundant set of literature, both theoretical and
empirical see Chirinko, 1993, for an interesting and critical synthesis. On the other hand, time-series based econometrics has developed drastically since the 70s and it is now common to deal with
non-stationarity see Dickey and Fuller, 1979 and to test co-integration or stable relations between variables belonging to the model under analysis see Engle and Granger, 1987. Such an inference has
been intensively implemented in many contexts e.g. consumption, money demand or foreign trade. Nevertheless few studies have been proposed to apply the above temporal procedures to the analysis
of long run fixed investment. In a disequilibrium context, de la Croix and Licandro 1993 have tested co-integration between rate of investment, Tobin’s q and the degree of utilisation of capacity for the
Belgian economy. In a neoclassical model Cuthbertson and Gasparro 1995 performed the same
Corresponding author. Tel.: 132-65-323-395; fax: 132-65-323-223. E-mail address
: verschuefucam.ac.be F. Verschueren. 0165-1765 00 – see front matter
2000 Elsevier Science S.A. All rights reserved.
P I I : S 0 1 6 5 - 1 7 6 5 0 0 0 0 2 8 9 - 5
290 F
. Verschueren Economics Letters 69 2000 289 –297
exercise between investment, output, Tobin’s q and debt using United Kingdom data. An argument for this lack of interest is that theory of optimal stock of capital gathers variables with flow and with
stock profiles. Recognizing that investment has a rather volatile profile with respect to smoother economic variables, the search for balanced specifications in a time-series point of view is hence
made more difficult. The direction proposed in the paper is based on co-integration inference in a present value model linking the value and the profit of the firm when these two variables are
integrated of order 1, or I1. The main result is that acceptance of stable long-run residuals
i.e. co-integration hypothesis
in our specifications, which are constructed from a neoclassical model with convex adjustment costs
, implies that the factors are chosen optimally with respect to the economic model. The paper is organised as follows. Section 2 gives details on the economic model. The general
