A Dynamic Factor Demand Model for the Swedish Pulp Industry — An Εuler Equation Approach

In this paper, we specify and estimate a dynamic factor demand model for the Swedish pulp industry. Firms are assumed to have rational expectations, and costs of adjustment are assumed to arise when the capital stock is altered. The model is estimated using firm specific translog cost functions, and panel data from 1972 to 1990. We find weak evidence of adjustment costs for capital. The average marginal adjustment cost is about 10 percent of the price of capital. All of the estimated own-price elasticities are negative, and the empirical cost functions have the desired properties from theory. Short- and long-term elasticities are calculated and the variances are estimated using the bootstrap technique. The results suggest that the user cost of capital is a significant determinant of pulp industry investments, while output level is not. We also find that pulp industry investments are insensitive to variations in the price of electricity.