The two key questions which motivate our work are: do bubbles exist (in the sense that stock market prices do not always correspond to the present value of expected future profitability) and, if bubbles exist, do they have an effect on business fixed investment? The case of Japan is particularly...

The user cost elasticity is a parameter of considerable importance in economics, with implications for the effects of budget deficits, tax-based savings incentives, monetary policy, corporate taxes, and tariffs and quotas on capital goods. This paper analyzes the econometric issues that account...

This paper introduces a new approach to understanding investment. The distinctive feature of our approach is that shocks to the economic fundamentals have both persistent and transitory components, and that firms must disentangle the persistent from the transitory shocks. The model generates...

Is real investment fully determined by fundamentals or is it sometimes affected by stockmarket misvaluation? We introduce three new tests that: measure the reaction of investment to sales shocks for firms that may be overvalued; use Fama-MacBeth regressions to determine whether "overinvestment"...