The Stock Market and Capital Accumulation: An Application to UK Data

Abstract

Because of the difficulty in measuring investment in intangible assets and frequent data revisions, estimates based on National Accounts investment data provide an imperfect measure of the capital stock. Following the influential work by Robert Hall for the United States, this paper provides an alternative measure of the UK capital stock based on asset prices. This market-based measure reflects the premise that in fair-valued financial markets the value of firms' securities reflects the value of their productive assets. In line with Hall's results for the United States, the paper suggests that for a range of adjustment costs, depreciation rates and starting values, market-based estimates of the UK capital stock have differed substantially from those based on National Accounts investment data. Despite some advantages over National Accounts based measures, market-based measures are likely to be more volatile, because financial markets' assessment of the value of intangible assets can potentially change rapidly. Nevertheless, they can be a useful cross-check of the National Accounts based measures of the UK capital stock.