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Published online by Cambridge University Press: 17 August 2016
Daniel Weiserbs has produced a very interesting model of investment behaviour in the six major countries of the EEC. As is usual in econometric studies he has had to steer a careful course between what is feasible and what is desirable. In particular for this study the data constraints are severe, since the data are annual and only for a 21 year period. In view of such constraints it is very important to have a clear economic interpretation of the coefficients to be estimated and in this paper we are supplied in most cases with a convincing story.
The model is however derived in a fairly ad hoc manner and this can sometimes have the disadvantage of hiding the full implications of the assumptions made. For example we know from work by Lucas (1967), Gould (1968) and others that if we assume that an industry or sector acts, as a whole, like a representative profit-maximizing firm with costs of adjusting its capital stock, then the use of a partial adjustment mechanism as specified in equation (6) implies that the representative firm has static expectations – that is future growth, as seen from a point in time, is expected to remain constant for all time into the future. Now since the expectation of growth one period ahead is in fact specified to be equal to growth this period, the model is implicitly assuming that, at each period, firms expect growth to continue at its present rate for ever – which must have been a depressing thought in 1981.
E.E.C., Brussels.