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Abstract

We examine the impact of major tax legislation on business capital investment during the 1980-88 period. We detail the tax changes and imbed them into a neoclassical rental price of capital goods. We then use this rental price in two popular models of business fixed investment, a standard and a modified neo-classical model. We estimate these two models along with an accelerator model of capital investment. The models, in general, exhibit parameter instability regardless of fit. We then develop a model incorporating expected delivery lags for new capital goods and embed a forecasted output and the rental price of capital services. Again, parameter instability and fit are examined. Finally we conduct simulations of tax, price and output shocks. We conclude that the new model has parameter stability, and that the net effect of Reagan's tax policies was small.

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