Tax policy and investment demand: A vintage approach

The effects of changes intax incentives for investment are investigated for a putty-clay vintage model in which replacement is an economic decision without requiring static expectations or steady-state growth. It is shown that, with a Cobb-Douglas ex ante production function, the effect on output and its price is identical with that in a non-vintage model with the same parameters. The effect on investment and employment is to introduce a long-run cyclical element. Some simulations for UK manufacturing show that even the direction of the short-run effect on investment and employment can be different dates.