Persistence of Capacity Shortage and the Role of Adjustment Costs |
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Authors: | Ciaran Driver,& Nigel Meade |
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Affiliation: | University of London |
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Abstract: | This paper finds that plant capital constraints on output in UK industry tend to persist for surprisingly long periods, reflecting a slow response of capital investment. The paper examines the conventional view that this response pattern may be explained by cost of adjustment. Using UK time‐series data for a small number of industry groups, it is shown that the observed dynamics of capital constraints (capital shortage) are not fully explained by a quadratic adjustment cost model or by alternative forms of adjustment cost. |
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