ABSTRACT
The demand for capital stock approach, though based on intertemporal profit maximizing behavior, is a partial equilibrium solution to a general equilibrium problem. In this approach there is no assurance that the sum of desired investment by the individual firms will equal aggregate saving. The partial equilibrium solutions can be scaled up or down to satisfy general equilibrium constraints. If firms could acquire capital stock as quickly as they hire labor services, the marginal productivity conditions could be solved simultaneously to obtain the optimal amounts of labor and investment. The Hickman model has the potential strength of an apriori specification of the lag structure, but Hickman varies the number of lagged independent variables for different industries in order to improve the statistical fit. The model of investment mirrors the historical relationships that have explained net investment for different industries in the US economy.
