Explaining the investment boom of the 1990s

Real equipment investment in the United States boomed in the 1990s, led by soaring investment in computers. We find that traditional aggregate econometric models completely fail to capture the magnitude of this growth—mainly because these models neglect to address two features that were crucial (and unique) to the 1990s' investment boom. First. the pace at which firms replace depreciated capital increased. Second, investment was more sensitive to the cost of capital. We document that these two features stem from the special behavior of investment in computers and therefore propose a disaggregated approach. This produces an econometric model that successfully explains the 1990s' equipment investment boom.