Persistence of capacity shortage and the role of adjustment costs

This paper finds that plant capital constraints on output in UK industry te nd to persist for surprisingly long periods, reflecting a slow response of capital investment. The paper examines the conventional view that this resp onse pattern may be explained by cost of adjustment. Using UK time-series d ata for a small number of industry groups, it is shown that the observed dy namics of a capital constraints (capital shortage) are not fully explained by a quadratic adjustment cost model or by alternative forms of adjustment cost.