Sufficient investment in the stock of capital goods is a prerequisite for a positive development of productivity. In the short run gross fixed capital formation is an important component of aggregate demand. In addition, given its pronounced variation, capital expenditure exacerbates the fluctuations in the economic cycle.
The short, medium, and long-term development of investment goods demand can be predicted by applying specific statistical tools. In order to get a complete picture of the market all available data deriving from the investment decision process are included in the analysis. The third element of the chart is the most decisive for indicating the level of a market in a particular time span. Companies that demand capital goods will respond to changes in the economic activity. The necessary capacity adjustment is accomplished by varying investment expenditure.
The statistical correlations between the segments of the chart are captured by regression models, which combine the respective time series. By simultaneously looking at as many aspects as possible of a capital goods market, the accuracy of forecasts can be improved. In addition, by modeling the temporal profile of capital goods demand, it is possible to take into account explicitly the lag structure of the investment decision process.
Importantly, the econometric analysis also provides a breakdown of investment demand into the two components, replacement and expansion investment.Consequently, it is possible to estimate the ratio of the required stock of capital goods to the quantity of capital already in use for a particular period. Therefore, in conjunction with the assumptions regarding the long-term perspectives of the economy, the forecast calculations comprise a balanced development of investment activity, aggregate demand, freight traffic, and capital stock. For predictions that are based on monthly and quarterly data, regression analysis is complemented by methods of time series forecasting.