Estimating the long-run user cost elasticity

The user cost elasticity is a parameter of central importance in economics. If the supply curve for capital is upward sloping (as is more likely in a large economy like the U.S.) and shocks to demand are important (as they are likely to be over the business cycle), estimates of the user cost elasticity that rely on high-frequency movements in the variables will tend to be biased. Applying cointegration techniques to a small, open economy yields an estimate of the long-run user cost elasticity that is about 75% larger (in absolute value) than the best existing estimate.