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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page IT Investment and Hicks’ Composite-Good Theorem: The U.S. Experience
Jaime Marquez; Shing-Yi Wang
2003-767  (June 2003)

Abstract:  We study whether aggregation residuals in U.S. private investment in information technology (IT) exhibit a predictable pattern that is consistent with Hicks' composite-good theorem and that may be used for forecasting. To determine whether one can extract such a pattern, we apply the general-to-specific strategy developed by Krolzig and Hendry (2001). This strategy combines ordinary least squares with a computer-automated algorithm that selects a specification based on coefficients' statistical significance, residual properties, and parameter constancy. Then, we derive the testable implications from Hicks' theorem and evaluate them with econometric formulations; we find qualified support for these implications. Having obtained these formulations, we evaluate their ex-post predictive accuracy and compare it to that of an autoregressive model. The key finding is that ignoring movement in relative prices results in a loss of information for predicting aggregation residuals.

Full paper (156 KB PDF)

Aggregation Errors, Fisher Aggregates, Divisia Aggregate, General-to-Specific

Related Material
Technical Appendix (64 KB PDF)   Detailed Regression Results

Technical Appendix (14 KB PDF)
  Detailed Forecasts

Programs (22 KB ZIP)

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

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