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Uncertainty and the slowdown of capital accumulation in Europe

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Abstract:

The slowdown in the process of capital formation in continental Europe in the 1990s is analysed. Sector-level data from the OECD's International Sectoral Data Base (ISDB) are used. Econometric estimates of an investment function indicate structural instability in the early 1990s and, specifically, a break in the coefficient linking the growth of capital stock to demand. This result neither seems to be related to non-linearities in the relationship between capital formation and expected demand, nor to the sectoral composition of European economies. Evidence is found that the drop in the accelerator is at least partly attributable to greater demand uncertainty in the 1990s as compared with the earlier period.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840210158958

Affiliations: Bank of Italy, Research Department, Via Nazionale 91, 00184, Rome, Italy

Publication date: January 1, 2003

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