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Session 7 b iariw oulton 290814

Parallel session IARIW 2014

1 of 17
Integrated Estimates of 
Capital Stocks and Services 
for the United Kingdom: 1950-2013 
Nicholas Oulton (LSE) & Gavin Wallis (BoE) 
discussion by 
Robert Inklaar (University of Groningen) 
! 
IARIW General Conference – Session 7B, August 29 2014 
1
Features 
• Comprehensive capital accounts for UK 
– Wide range of assets → 
– Long period of time → 
– Aggregate & industry trends → 
– Capital services methodology →
Features 
• Comprehensive capital accounts for UK 
– Wide range of assets → 9, incl. ICT & R&D 
– Long period of time → 63 years 
– Aggregate & industry trends → 19 industries 
– Capital services methodology → Oulton (2007)
Why this paper is nice 
• UK ONS is oddly hesitant to publish capital series 
• And what is published has short time series 
• And/or is internally inconsistent 
• Implementation of capital services methodology 
remains tricky 
• And this work makes careful comparisons
What I will comment on 
• Choice for the rates of return 
– Oulton’s (2007) ‘hybrid’ method 
• Choice for the set of assets 
– SNA 2008 compatible, but…
Methodology 
• “Plain vanilla” capital services measurement… 
• Investment by asset for full period (R&D since 1981) 
• Capital stocks using PIM & Fraumeni (1997) 
depreciations rates 
• Stocks in 1950 based on investment series starting 
‘well before 1950’ (Wallis, 2009)… Hmm ok 
• Rental prices used for aggregation

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Session 7 b iariw oulton 290814

  • 1. Integrated Estimates of Capital Stocks and Services for the United Kingdom: 1950-2013 Nicholas Oulton (LSE) & Gavin Wallis (BoE) discussion by Robert Inklaar (University of Groningen) ! IARIW General Conference – Session 7B, August 29 2014 1
  • 2. Features • Comprehensive capital accounts for UK – Wide range of assets → – Long period of time → – Aggregate & industry trends → – Capital services methodology →
  • 3. Features • Comprehensive capital accounts for UK – Wide range of assets → 9, incl. ICT & R&D – Long period of time → 63 years – Aggregate & industry trends → 19 industries – Capital services methodology → Oulton (2007)
  • 4. Why this paper is nice • UK ONS is oddly hesitant to publish capital series • And what is published has short time series • And/or is internally inconsistent • Implementation of capital services methodology remains tricky • And this work makes careful comparisons
  • 5. What I will comment on • Choice for the rates of return – Oulton’s (2007) ‘hybrid’ method • Choice for the set of assets – SNA 2008 compatible, but…
  • 6. Methodology • “Plain vanilla” capital services measurement… • Investment by asset for full period (R&D since 1981) • Capital stocks using PIM & Fraumeni (1997) depreciations rates • Stocks in 1950 based on investment series starting ‘well before 1950’ (Wallis, 2009)… Hmm ok • Rental prices used for aggregation
  • 7. Rental prices • General rental price formulation: ! rental price = tax x [rate of return + depreciation - asset ! 1+ πijt ( )− πijt ⎡⎣ K = Tijt rjt + δi pijt revaluation] x asset price • But how to operationalise this? ⎤⎦ A pijt−1 • Choosing rates of return and asset revaluation
  • 8. Rate of return (1) • Conceptual framework building on Berndt and Fuss (1986) • Investment decision: ex-ante required rate of return • Productive return: ex-post observed (internal) rate of return
  • 9. Rate of return (2) • Oulton's (2007) hybrid method: ! The hybrid method assumes risk at the beginning of the period. So the rate of return is not necessarily equalised across assets ex post. ! Under the hybrid method, firms seek to equalise the required real rate of return across assets, forming expecta'ons of infla?on and changes in asset prices. ! The required real rate of return is modelled by the mean actual real rate [for the market economy], since the la@er is sta?onary. Expected changes in prices are modelled by an AR(1) process.
  • 10. .3 .2 .1 0 Real rate of return in the UK % p.a., market sector, 1950-2012 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Note: R&D included
  • 11. Capital stocks and capital services in the UK (ex post method) 6 5 4 3 2 1 growth rates, % p.a., market sector, 1950-2012 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 VICS (Törnqvist) Capital stock (Törnqvist) Note: R&D included Capital services (VICS) grow more rapidly than the aggregate stock Remark: time pattern seems shifted by 1 year. Why?
  • 12. 6 5 4 3 2 1 Hybrid and ex post estimates of VICS compared whole economy, per cent per year 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Hybrid Ex post Note: R&D included. Chained Törnqvist indices.
  • 13. Comments • How helpful is the hybrid approach? • “Required rate” versus financial market cost of capital • Required real rate may be stationary, but is not constant • Industry variation in returns may be large, but may also be informative • Asset coverage matters for results • Draw on my earlier US results (Inklaar; RoIW, 2010)
  • 14. 0 .05 .1 .15 .2 .25 US Market economy rates of return, 1977-2005 Internal rate of return Weighted average cost of capital 1975 1980 1985 1990 1995 2000 2005
  • 15. Industry variation in rates of return Weighted average cost of capital 0 .05 .1 .15 .2 Transport Agriculture Misc mfg Communications Electric/electronic Construction Transport eq Mining Social/personal ser Retail trade Utilities Hotels/restaurants Metal prods Motor trade Wholesale trade Oil Machinery Textiles/clothing Non-metallic mineral Wood Paper/printing/pub Food/tobacco Rubber/plastics Business ser Chemicals Finance See also Gornig, Görzig & Werwatz (2014), this conference on risk vs return
  • 16. US rate of return, average 1977-2005 0 .05 .1 .15 Fixed reproducible assets plus land & inventories plus intangible Weighted average cost of capital
  • 17. Capital contribution to market economy growth IRR WACC Hybrid 0 .5 1 1.5 2 2.5 Fixed reproducible assets plus land & inventories plus intangible Note: capital contribution computed as the share of capital income in GDP times capital services growth IRR: internal rate of return, WACC: weighted average cost of capital