EXCHANGE RATE,EXPECTED PROFIT AND CAPITAL STOCK ADJUSTMENT: JAPANESE EXPERIENCE

This paper empirically investigates the impact of exchange rate shocks on capital stock adjustment in the Japanese industry. An intertemporal optimization model is developed, in which an individual corporation in an open economy adjusts its capital stock according to Tobin's q. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates investment, especially in the machinery sector.     

Uncertainty and Investment: Evidence from Australian Firm Panel Data

This paper investigates the key drivers of fixed firm investment of listed non‐financial companies in Australia over the period from 1987 to 2009. A Tobin's q model of investment is augmented to account for the effect of economic uncertainty on the investment decision. The effects of Tobin's q, sales and cash flows on firm investment rate are also analysed and discussed. Consistent with existing literature, this research finds clear evidence of negative effects of both macroeconomic and firm idiosyncratic uncertainty on Australian firm investment. However, evidence also shows that firm‐specific uncertainty is more important in explaining firm investment than macroeconomic uncertainty.     

Money,government debt,q, and investment

The aim of this study is to analyze empirically the linkages among changes in money and federal debt, Tobin's q variable, and investment expenditures in the United States. The vector autoregressive modeling technique proposed by Hsiao and extended by Caines, Keng, and Sethi is employed. The patterns of Granger-causality from the estimated vector autoregression are consistent with the transmission mechanism outlined by Tobin. Both money and debt Granger-cause q; q in turn causes investment and money and debt's effects upon investment operate primarily through their effects on q. However, neither money nor debt are exogenous.     

Growing through Cycles in an Infinitely Lived Agent Economy

This paper extends the analysis of K. Matsuyama (Econometrica67 (1999), 335–347) to the case of an infinitely lived representative agent economy. The economy grows endogenously through endogenous fluctuations, perpetually moving back and forth between two phases. In one phase, there is no innovation, the market structure is competitive, and the economy grows solely by capital accumulation. In the other phase, new goods are introduced and the market structure is monopolistic. In the long run, both investment and innovation grow at the same rate, but the economy alternates between the periods of high investment and the periods of higher innovation. Journal of Economic Literature Classification Numbers: E32, O11.     

Tobin <Emphasis Type="Italic">q</Emphasis>: Forecast performance for hierarchical Bayes,shrinkage, heterogeneous and homogeneous panel data estimators

This paper reconsiders the Tobin q investment model studied by Hsiao et al. (1999) using a panel of 337 U.S. firms over the period 1982–1998. It contrasts the out-of-sample forecasts performance of hierarchical Bayes, shrinkage, as well as heterogeneous and homogeneous panel data estimators. We are very grateful to Cheng Hsiao and A. Kamil Tahmiscioglu for providing us with the data set and computer code for the Hierarchical Bayes estimator as well as useful suggestions and comments.     

The Wicksell-Tobin investment model

We formalize in this paper Wicksell's investment decision model and compare it with Tobin's q-theory. Wicksell's firms either compare the natural rate of interest with the prevailing market interest rate or the capital values with the replacement costs of investment projects. This exposition of Wicksell's approach reveals some striking similarities with Tobin's supply-price-of-capital model, which relates the marginal efficiency of capital to the rate of return required by portfolio investors in the well-known q-ratio. The ratio market value to replacement cost of capital should, therefore, more appropriately be termed the Wicksell-Tobin q. Our formalization of Wicksell's investment theory appears to open up a promising new avenue for further research in cases where banks provide the source of funds.     

Q-theory of investment and earnings retentions—evidence from Scandinavia

In a frictionless milieu, retentions should have no impact on investment behavior. Empirical studies, however, typically find that retentions are an important determinant of investment. Managerial discretion and financial constraints are two alternative explanations that have been suggested. This article uses a panel of listed Scandinavian firms to examine the importance of earnings retentions as a determinant of investment. Measures of Tobin’s Q, marginal q, and sales accelerator are used to control for investment opportunities. Scandinavian firms are found to depend on earnings retentions to a high degree, more so than in other developed economies. This high dependence on retentions suggests that the Scandinavian capital markets are suffering from allocational inefficiencies. This can be assumed to have detrimental effects on the speed of structural change. Moreover, these market frictions appear too large to per se be caused by information asymmetries or managerial discretion phenomena. Possible institutional explanations are suggested.     

The microfoundations of business cycles: an evolutionary, multi-agent model

This work presents an evolutionary model of output and investment dynamics yielding endogenous business cycles. The model describes an economy composed of firms and consumers/workers. Firms belong to two industries. The first one performs R&D and produces heterogeneous machine tools. Firms in the second industry invest in new machines and produce a homogenous consumption good. Consumers sell their labor and fully consume their income. In line with the empirical literature on investment patterns, we assume that firms’ investment decisions are lumpy and constrained by their financial structure. Simulation results show that the model is able to deliver self-sustaining patterns of growth characterized by the presence of endogenous business cycles. The model can also replicate the most important stylized facts concerning micro- and macro-economic dynamics.     

金融发展、资本积累与内生增长:一个评述

本文以资本外溢AK内生增长模型为基础,对金融发展、资本积累与经济增长关系的理论研究和经验分析作了一个文献综述.理论研究表明:金融发展通过提高储蓄转化为资本比率、改善投资配置效率和改变储蓄率等途径促进资本积累和经济增长;金融发展与经济增长之间呈互相促进、互为因果的双向关系,并形成金融发达、经济高增长和金融欠发达、经济低增长的双重均衡.经验分析显示,金融发展与经济增长之间呈显著正相关关系,这证实了金融发展与内生增长理论的预测.     

Endogenous I-S and External L-M Diagram in Equilibrium towards Policy-Making

This paper reforms the conventional I-S and L-M diagram endogenously, clarifying how to finalize the relationship between the real and financial assets, replacing the I-S by the rate of return function of the ratio of investment to output/income and the L-M by the ratio of M2 to endogenous capital K, after verifying the neutrality of the markets to the real assets, and using endogenous parameters and variables in the 58 country data-sets, 1990–2007 (KEWT 3.09), with three average areas, where equilibrium holds by year, country, and sector, over years. This diagram and its interpretation are able to present urgent policies for perceiving a bud of bubbles and suggesting urgent steps not to reoccur bubbles.     

OVERLAPPING GENERATIONS MODEL,INVESTMENT FUNCTION AND DYNAMIC EFFICIENCY OF RESOURCE ALLOCATION*

This paper suggests that the possibility of dynamically inefficient resource allocation as pointed out by Diamond (1965) is due to the neoclassical property of that model where no investment instalment cost, and hence no investment function in the proper sense, may exist. If one introduces, instead, Tobin's q-theory type investment function, competitive equilibrium is shown to be consistent only with the dynamically efficient use of resources.     

Growth dynamics in a model of endogenous time preference

We incorporate endogenous time preference in a simple Diamond-type economy with production and analyze the resulting dynamics both for the competitive and command equilibrium. We assume an individual's rate of time preference is decreasing in consumption (decreasing marginal impatience) and show that this intuitively more appealing assumption is consistent with a stable, non-trivial competitive equilibrium. Analysis of the competitive equilibrium indicates that the observed ‘non-convergence’ of cross-country per capita income could partially be explained by cross-country differences in ‘innate patience’. Examination of the local dynamics around the ‘optimal’ solution suggests that this particular preference structure exhibiting diminishing marginal impatience may generate endogenous business cycle phenomenon.     

DETERMINANTS OF PRIVATE INVESTMENT IN MALAYSIA: WHAT CAUSES THE POSTCRISIS SLUMPS?

This paper examines the determinants of private investment in Malaysia, with an emphasis on the postcrisis investment slumps. A static private investment function is derived from the neoclassical framework, with appropriate modifications to account for the structural features observed in the country. To introduce dynamics into the model, we adopt a cost minimization problem, which assumes firms optimize investment levels with respect to a quadratic loss function. The results suggest that the availability of financial resources in the economy has a significant positive impact on private investment. Macroeconomic uncertainty exerts a negative influence on the investment climate in the private sector. Both foreign direct investment and public investment are found to have a complementary effect on private investment. Consistent with the prediction of the neoclassical model, a higher level of aggregate output raises private investment, whereas the user cost of capital has the opposite impact. (JEL O16, O53)     

Do price-earnings ratios explain investment decisions better than Tobin’s q? Evidence from German firm-level data

This article tests the additional information content of price-earnings ratios, with respect to Tobin’s q, in explaining firms’ investment behaviour. While Tobin’s q describes the expected future earnings related to those projected by the book value, the price-earnings ratio compares future growth of earnings based on the projection of current earnings. In other words, a high price-earnings ratio might indicate that investors are willing to rely on future earnings growth, even though current earnings are low. By using an unbalanced panel of about 500 listed firms from Germany over the period 1987–2007, we find that including the price-earnings ratio in the investment equation does not change the explanatory power of Tobin’s q. Most notably, the price-earnings ratio exerts a positive and significant impact on investment. These results are robust to the inclusion of a measure of the firm’s internal funds and of fixed effects and also to the use of different estimators.     

Dividend taxes,corporate investment,and ‘Q’

Taxes on corporate distributions have traditionally been regarded as a ‘double tax’ on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alternative to this traditional view. One explanation of why firms in the United States pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between a corporation's decision to pay out dividends or to retain earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions.This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's ‘q’ theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimated under each theory's predictions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.     

Public Investment Rules and Endogenous Growth with Empirical Evidence From Canada

This paper examines theoretically and empirically the effects of public investmentrules on output growth in an economy with private and public capital. It is shownthat the decisions on public capital formation are closely associated with the growthrate of output and generate endogenous growth. A permanent change in the policyrule implies a new long-run growth rate of output, but the economy will onlygradually approach the new steady-state due to adjustment costs in private capitalaccumulation. The model predictions are tested using data from Canada for theperiod 1955-1999. The data support the endogenous growth hypothesis and thetwo central assumptions of the model: (i) the growth rate of output follows closelythe rate of infrastructure formation and (ii) private capital formation also followsthe rate of infrastructure formation but adjusts with a delay.     

Optimal risk adoption: a real options approach

Summary. This study develops a real options approach for analyzing the optimal risk adoption policy in an environment where the adoption means a switch from one stochastic flow representation into another. We establish that increased volatility does not necessarily decelerate investment, as predicted by the standard literature on real options, once the underlying volatility of the state variable is made endogenous. We prove that for a decision maker with a convex (concave) objective function, increased post-adoption volatility increases (decreases) the expected cumulative present value of the post-adoption profit flow, which consequently decreases (increases) the option value of waiting and, therefore, accelerates (decelerates) current investment.Received: 12 October 2001, Revised: 4 December 2002, JEL Classification Numbers: O32, G30, D92, C61. Correspondence to: Luis H.R. AlvarezConstructive comments from an anonymous referee are acknowledged. The financial support from the Foundation for the Promotion of the Actuarial Profession (Aktuaaritoiminnan Kehittämissäätiö) to Luis H. R. Alvarez is gratefully acknowledged. Both authors are grateful for the financial support from The Yrjö Jahnsson Foundation.     

Immigration and the natural rate of unemployment in Australia

This paper presents an indirect test of the proposition that a decrease in the rate of immigration into Australia during the early 1960s lowered the efficiency with which unemployed persons and unfilled job vacancies were matched, and increased labor turnover, thereby increasing the “natural” rate of unemployment. A theoretical model of employment growth is used to derive an expression for the steady-state relationship between unemployment and vacancies. Estimates of the model are obtained for the period 1955i–1973ii during which distinctly different immigration levels occurred. The empirical results are not consistent with the contention that a decrease in immigration caused the relationship between unemployment and job vacancies in Australia to shift outward. Therefore, the evidence suggests that the unemployment rate associated with a given level of labor demand was not significantly increased by the reduction in immigration to Australia.     

Irreversible investment with regime shifts

Under the real options approach to investment under uncertainty, agents formulate optimal policies under the assumption that firms’ growth prospects do not vary over time. This paper proposes and solves a model of investment decisions in which the growth rate and volatility of the decision variable shift between different states at random times. A value-maximizing investment policy is derived such that in each regime the firm's investment policy is optimal and recognizes the possibility of a regime shift. Under this policy, investment is intermittent and increases with marginal q. Moreover, investment typically is very small but, in some states, the capital stock jumps. Implications for marginal q and the user cost of capital are also examined.     

THE POST‐ASIAN CRISIS DROP IN INVESTMENT: THE CASES OF INDONESIA,KOREA, MALAYSIA,AND THAILAND

This study analyzes drops in East Asian investment and their determinants after the 1997–1998 Asian financial crisis. We first employ a random level‐shift autoregressive model to quantify the shift in investment ratios of four Asian economies hit by the 1997–1998 Asian financial crisis: Indonesia, Korea, Malaysia, and Thailand. We trace the major historical shifts in the levels of investment ratios and we find that the cumulated downward shifts in investment ratios during 1997–1998 for Indonesia, Korea, Malaysia, and Thailand are 6, 5, 14, and 14 percentage points, respectively. The investment ratios of most countries experienced several rebounds between 1999 and 2001, but the rebounds were too small to bring investment ratios back to their pre‐1990 levels. Having identified the episodes of investment shifts, the Bayesian Model Averaging (BMA) and several robust tests are employed to investigate the determinants of those level shifts in investment ratios. We find that real per capita gross domestic product growth and banking crises are the two most important factors contributing to shifts in the investment levels of these four crisis‐hit Asian economies. The results are useful in understanding the causes and remedies of global imbalances. (JEL C11, E22, F32, O53)