Interpreting Estimation Results of Euler Equation Investment Models when Factor Markets are Imperfectly Competitive

In this paper the standard Euler equation investment model with imperfectly competitive product markets is extended for imperfectly competitive structures on the factor markets: labour markets and markets for investment goods. This extension leads to two additional explanatory variables in the Euler equation. Although economically reasonable, the resulting equation for a simple reason cannot be estimated: parts of the explanatory variables are perfectly collinear. For estimation purposes at least one of these variables has to be neglected. Neglecting one of the additional variables, the coefficients to be estimated have to be interpreted as linear combinations of the "true" coefficients. The differences between the "true" coefficients and the linear combinations are numerically demonstrated.

Janz, Norbert (1997), Interpreting Estimation Results of Euler Equation Investment Models when Factor Markets are Imperfectly Competitive , ZEW Discussion Paper Nr. 97-29, Mannheim.