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Is investment time irreversible? Some empirical evidence for disaggregated UK manufacturing data

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Abstract:

It has long been suggested that investment may be time irreversible, and consideration of the option value of waiting to invest has aroused renewed interest in this issue. This study tests for time irreversibility in UK investment according to disaggregation by type of investment expenditure and across manufacturing sector groupings. The test results reported indicate that the irreversibility of investment patterns varies not only from industry to industry but also according to the type of capital being purchased, with significant time irreversibility detected in gross fixed capital formation and aggregate vehicles expenditure, and industrial sector groupings comprising fuels and oil refining, engineering and vehicles, and textiles and leather. However, only in the first and last of these series is time irreversibility attributable to non-linearities in the underlying data generating process, and consistent with threshold effects which may be associated with (S,s) type models of investment dynamics.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500427551

Affiliations: Department of Economics, University of Wales Swansea, Singleton Park, Swansea SA2 8PP, UK

Publication date: October 20, 2006

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