Monetary and real causes of investment booms and declines

The 1900s have marked two major investment booms in the United States. The boom of the 1920s was followed by the Great Depression of the 1930s, in which investment demand fell sharply. The second boom, of the 1950s and 60s, has been followed by a period of lagging investment. The economics literature reflects two disparate schools of thought on long-term investment behavior: the accelerator theory and the monetarist theory. This paper develops an investment function that interrelates monetary and real variables. Analysis of the investment function identifies several powerful non-monetary forces that can trigger investment booms with subsequent collapse due to overexpansion. Money is shown to be a critical element in sustaining a boom, but monetary contraction during the succeeding decline appears to be a symptom rather than essential cause of investment stagnation. The results thus point toward an integration of the monetarist and accelerator theories.