Estimating UK capital adjustment costs

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 12 May 2005

Working Paper No. 258
By Charlotta Groth

This paper estimates UK capital adjustment costs, using a data set for 34 industries spanning the whole UK economy for the period 1970-2000. The results show that it is costly to install new capital, and that it has been more costly to adjust the level of non-ICT capital (plant, machinery, buildings and vehicles) compared to the level of ICT capital (computers, software and telecommunications). The results are applied to an analysis of total factor productivity (TFP) growth. That analysis is focused on the 1990s - a period when the growth rate of the standard measure of TFP fell in the United Kingdom, while rising sharply in the United States. The estimates suggest that capital adjustment costs accounted for around two thirds of the observed  lowdown in UK TFP growth. However, the adjustment is not large enough to reverse the finding that UK TFP growth declines in the second half of the 1990s, unlike the US experience of rising TFP growth.

PDFEstimating UK capital adjustment costs

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