Abstract
Investment is an important contributor to aggregate demand, and it is critical to fostering productivity and fueling innovation. Absent from the existing literature on business investment is the recognition that the determinants of investment have changed over time in fundamental ways. Using quarterly data from 1953–2016, we estimate an augmented accelerator function of U.S. business investment and present evidence of a structural change in the year 2000. Our findings suggest that while the accelerator and crowding-out effects have weakened over time, the sensitivity of investment growth to cost of capital, risk spread, cash flows, and economic policy uncertainty have increased in recent years. In light of these results, we highlight and evaluate several recent hypotheses regarding structural changes in the U.S. economy. In particular, we argue that our results are not consistent with the secular stagnation hypothesis, but are more closely connected to long-term trends in demographics, market concentration, financialization, and the inter-industry reconfiguration of firms away from traditional manufacturing.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
The capital stock data is available only as an annual series. To construct quarterly values, we employed a linear extrapolation using the investment measure and data on annual depreciation rates.
As the main focus of this paper is the long-run equilibrium relationships among the variables, only the long-run elasticities corresponding to Eq. (8) are reported here.
We subsequently tested each subsample for additional breaks, but none reached conventional levels of statistical significance.
Although see Acemoglu and Restrepo (2017) for an opposing view.
This was the central theme of the Federal Reserve’s Jackson Hole meetings in 2018.
Although see Freund and Sidhu (2017) for an opposing view.
References
Aaronson D, Davis J, Hu L (2012) Explaining the Decline in the U.S. Labor Force Participation Rate. Chicago Fed Letter 296. Fed Reserv Bank Chicago. https://www.chicagofed.org/publications/chicago-fed-letter/2012/march-296. Accessed 9 September 2019.
Abberger K, Dibiasi A, Siegenthaler M, et al (2016) The Effect of Policy Uncertainty on Investment Plans : Evidence from the Unexpected Acceptance of a Far-Reaching Referendum in Switzerland. CESifo Working Paper 5887.
Abel AB (1981) A Dynamic Model of Investment and Capacity Utilization. Q J Econ 96:378–403. https://doi.org/10.2307/1882679
Abel AB (2015) The Analytics of Investment, q, and Cash Flow. Natl Bur Econ Res Work Pap Ser No. https://doi.org/10.3386/w21549
Acemoglu D, Restrepo P (2017) Secular stagnation? The effect of aging on economic growth in the age of automation. Am Econ Rev 107:174–179. https://doi.org/10.1257/aer.p20171101
Adam S (2019) Financialization and Income Inequality in the United States. Kalamazoo College, Working Paper.
Alexander L, Eberly J (2018) Investment Hollowing Out. IMF. Econ Rev 66:5–30. https://doi.org/10.1057/s41308-017-0044-2
Autor DH, Dorn D, Hanson GH, Song J (2014) Trade adjustment: Worker-level evidence. Q J Econ. https://doi.org/10.1093/qje/qju026
Autor DH, Dorn D, Hanson GH (2016) The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade. Annual Review of Economics 8:205–240. https://doi.org/10.1146/annurev-economics-080315-015041
Azzimonti M (2015) Partisan Conflict and Private Investment. NBER Working Paper 21273. https://doi.org/10.3386/w21273
Baker SR, Bloom N, Canes-Wrone B et al (2014) Why has US policy uncertainty risen since 1960? Am Econ Rev 104:56–60. https://doi.org/10.1257/aer.104.5.56
Baker SR, Bloom N, Davis SJ (2016) Measuring Economic Policy Uncertainty. NBER Working Paper 21633. https://doi.org/10.3386/w21633
Balta N, Fernández IV, Ruscher E (2013) Assessing the impact of uncertainty on consumption and investment. Sect I, Q Rep Euro Area 12:7–16. http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea2_en.pdf.
Barkbu B, Berkmen SP, Lukyantsau P, et al (2015) Investment in the Euro Area: Why Has It Been Weak? IMF Working Paper WP/15/32. https://www.imf.org/external/pubs/ft/wp/2015/wp1532.pdf. Accessed 27 July 2016.
Bernanke B, Gertler M (1989) Agency costs, net worth, and business fluctuations. Am Econ Rev 79:14–31. https://doi.org/10.2307/1804770
Bernanke B, Bohn H, Reiss PC (1988) Alternative non-nested specification tests of time-series investment models. J Econom 37:293–326. https://doi.org/10.1016/0304-4076(88)90008-5
Bertola G, Caballero RJ (1994) Irreversibility and aggregate investment. Rev Econ Stud 61:223. https://doi.org/10.2307/2297979
Blackley PR (2014) New estimates of direct crowding out (or in) of investment and of a peace dividend for the U.S. economy. J Post Keynes Econ 37:67–90. https://doi.org/10.2753/PKE0160-3477370106
Bloom N (2009) The Impact of Uncertainty Shocks. Econometrica 77:623–685. https://doi.org/10.3982/ECTA6248
Bloom N (2014) Fluctuations in Uncertainty. J Econ Perspect 28:153–176. https://doi.org/10.1257/jep.28.2.153
Bloom N, Bond S, Van Reenen J (2007) Uncertainty and Investment Dynamics. Rev Econ Stud 74:391–415. https://doi.org/10.1111/j.1467-937X.2007.00426.x
Bussière M, Ferrara L, Milovich J (2015) Explaining the Recent Slump in Investment: the Role of Expected Demand and Uncertainty. Banque De France Document De Travail No 571. https://www.banque-france.fr/sites/default/files/medias/documents/document-de-travail_571_2015.pdf. Accessed 16 June 2017.
Cavallo E, Daude C (2011) Public investment in developing countries: A blessing or a curse? J Comp Econ 39:65–81. https://doi.org/10.1016/j.jce.2010.10.001
Cecchetti SG, Kharroubi E (2012) Reassessing the impact of finance on growth. BIS Work Pap 381. https://www.bis.org/publ/work381.pdf. Accessed 20 September 2019.
Chenery HB, Kuznets S, Chenery HB et al (1953) Problems of Capital Formation in Underdeveloped Countries. Econ J 5:252. https://doi.org/10.2307/2226317
Clark PK, Greenspan A, Goldfeld SM, Clark PK (1979) Investment in the 1970s: Theory, Performance, and Prediction. Brookings Pap Econ Act 10:73–124. https://doi.org/10.2307/2534305
Ćorić B (2011) The financial accelerator effect : concept and challenges. Financ Theory Pract 35:171–196. https://doi.org/10.2139/ssrn.1702814
Cornett MM, Ors E, Tehranian H (2002) Bank Performance around the Introduction of a Section 20 Subsidiary. Journal of Finance 57:501–522
Crouzet N, Eberly J (2018) Intangibles, Investment, and Efficiency. AEA Pap Proc 108:426–431. https://doi.org/10.1257/pandp.20181007
Cyree KB (2000) The Erosion of the Glass-Steagall Act: Winners and Losers in the Banking Industry. Journal of Economies and Business 52:343–363
Danziger S, Van Der Gaag J, Smolensky E, Taussig MK (1982) The life-cycle hypothesis and consumption behavior of the elderly. J Post Keynes Econ 5:208–227
Davis EP (2010) New International Evidence on Asset-Price Effects on Investment, and a Survey for Consumption. OECD J Econ Stud 2010:269–318
De Loecker J, Eeckhout J (2018) Global Market Power. NBER Working Paper 24768. https://doi.org/10.3386/w24768.
Dohmen TJ, Falk A, Golsteyn B et al (2017) Risk Attitudes Across the Life Course. Economic Journal 127:F95–F116. https://doi.org/10.1111/ecoj.12322
Dreger C, Reimers H-E (2016) Does public investment stimulate private investment? Evidence for the euro area. Econ Model 58:154–158. https://doi.org/10.1016/j.econmod.2016.05.028
Duernecker, G, Herrendorf, B, Valentinyi, A (2017) Structural change within the service sector and the future of Baumol's disease. CEPR Discussion Paper 12467. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12467. Accessed 28 September 2020.
Eden M, Kraay A (2014) Crowding in and the returns to governmentiInvestment in low-income countries. World Bank Policy Research Working Paper 6781. http://documents.worldbank.org/curated/en/183961468154154131/pdf/WPS6781.pdf. Accessed 2 July 2016.
Eggertsson GB, Mehrotra NR, Summers LH (2016) Secular stagnation in the open economy. American Economic Review 106:503–507. https://doi.org/10.1257/aer.p20161106
Erden L, Holcombe RG (2005) The Effects of Public Investment on Private Investment in Developing Economies. Public Financ Rev 33:575–602. https://doi.org/10.1177/1091142105277627
Erden L, Holcombe RG (2006) The linkage between public and private investment: a co-integration analysis of a panel of developing countries. East Econ J 32:479–492
Fernald JG, Hall RE, Stock JH, Watson MW (2017) The Disappointing Recovery of Output after 2009. Brook Pap Econ Act 2017:1–81. https://doi.org/10.3386/w23543
Foroohar F (2016) Makers and takers: the rise of finance and the fall of american business. Crown Business, New York
French E, De Nardi M, Jones JB, et al (2006) Right before the end: Asset decumulation at the end of life. Econ Perspect, Reserv Bank Chicago 2006:1–13. http://users.nber.org/~denardim/research/French_De_Nardi_Jones_Baker_Doctor.pdf. Accessed 2 August 2018.
Freund C, Sidhu D (2017) Global competition and the rise of China. Peterson Institute of International Economics Working Paper 17–3. https://piie.com/publications/working-papers/global-competition-and-rise-china. Accessed 10 August 2019.
Gennaioli N, Ma Y, Shleifer A (2015) Expectations and Investment. NBER Working Paper 21260. https://doi.org/10.3386/w21260
Gertler M, Gilchrist S, Natalucci FM (2007) External constraints on monetary policy and the financial accelerator. J Money, Credit Bank 39:295–330. https://doi.org/10.1111/j.0022-2879.2007.00027.x
Gordon RJ (2015) Secular Stagnation: A Supply-Side View. Am Econ Rev 105:54–59. https://doi.org/10.1257/aer.p20151102
Guiso L, Parigi G (1999) Investment and Demand Uncertainty. Q J Econ 114:185–227. https://doi.org/10.1162/003355399555981
Gutiérrez G, Philippon T (2017a) Investmentless Growth: An Empirical Investigation. Brookings Papers on Economic Activity Conference Draft. https://www.brookings.edu/wp-content/uploads/2017/09/2_gutierrezphilippon.pdf. Accessed 10 January 2018.
Gutiérrez G, Philippon T (2017b) Declining Competition and Investment in the U.S. NBER Working Paper 23583. https://doi.org/10.3386/w23583
Hall RE, Jorgenson DW (1967) Tax Policy and Investment Behavior. Am Econ Rev 57:391–414. https://doi.org/10.2307/1812110
Hassan M, Nassar R, Liu C (2014) Effect of Government Deficit Spending on the Gdp in the United States. J Econ Econ Educ Res 15:103
Hayashi F (1982) Tobin’s Marginal q and Average q: A Neoclassical Interpretation. Econometrica 50:213. https://doi.org/10.2307/1912538
Hebous S, Zimmermann T (2016) Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement. IMF Working Paper WP/16/60. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Can-Government-Demand-Stimulate-Private-Investment-Evidence-from-U-S-43784. Accessed 1 July 2016.
Hubbard RG, Kashyap AK, Whited TM (1995) Internal Finance and Firm Investment. J Money, Credit Bank 27:683–701. https://doi.org/10.2307/2077743
International Monetary Fund (2015) World Economic Outlook: Uneven Growth Short- and Long-Term Factors. World Economic and Financial Surveys. https://doi.org/10.1163/187502311797543854
Irmen A, Litina A (2016) Population Aging and Inventive Activity. CREA Discussion Paper Series 2016–03. https://wwwfr.uni.lu/recherche/fdef/crea/publications/discussion_papers/2016. Accessed 14 July 2017.
John D. (1999) Gramm-Leach-Bliley Act (S. 900): A Major Step Toward Financial Deregulation. The Heritage Foundation. https://www.heritage.org/government-regulation/report/gramm-leach-bliley-act-s-900-major-step-toward-financial-deregulation
Jorgenson DW (1963) Capital Theory and Investment Behavior. Am Econ Rev 53:247–259. https://doi.org/10.2307/1823868
Kopcke RW, Brauman RS (2001) The performance of traditional macroeconomic models of businesses’ investment spending. New Engl Econ Rev 2:3–39
Kothari SP, Lewellen J, Warner JB (2014) The Behavior of Aggregate Corporate Investment. MIT Sloan Research Paper 5112-14. https://doi.org/10.2139/ssrn.2511268
Koyck LM (1954) Distributed lags and investment analysis. North-Holland Pub. Co., Amsterdam
Lee J, Rabanal P (2010) Forecasting U.S. Investment. IMF Working Paper 10/246. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Forecasting-U-S-24333. Accessed 16 June 2017.
Lewis C, Pain N (2014) Lessons from OECD forecasts during and after the financial crisis. OECD J Econ Stud 1:9–39. https://doi.org/10.1787/eco_studies-2014-5jxrcm2glc7j
Link S (2006) Do government purchases crowd out investment? Int Rev Econ 53:323–333
Mamun AA, Hassan MK, Lai VS (2004) The Impact of the Gramm-Leach-Bliley Act on The Financial Services Industry. J Econ Finance 28(3):2004
Mason, J (2015) Disgorge the cash: the disconnect between corporate borrowing and investment. The Roosevelt Institute. http://bit.ly/1GJvOC4. Accessed 10 September 2020.
Narayan PK (2005) The Saving and Investment Nexus for China: Evidence from Cointegration Tests. Appl Econ 37:1979–1990. https://doi.org/10.1080/00036840500278103
Oliner S, Rudebusch G, Sichel D (1995) New and Old Models of Business Investment : A Comparison of Forecasting Performance. J Money, Credit Bank 27:806–826. https://doi.org/10.2307/2077752
Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econom 16:289–326. https://doi.org/10.1002/jae.616
Philippon T (2009) The Bond Market’s q. Q J Econ 124:1011–1056. https://doi.org/10.1162/qjec.2009.124.3.1011
Pindyck RS, Rotemberg JJ (1983) Dynamic Factor Demands and the Effects of Energy Price Shocks. Am Econ Rev 73:1066–1079
Rapach DE, Wohar ME (2007) Forecasting the recent behavior of US business fixed investment spending: an analysis of competing models. J Forecast 26:33–51. https://doi.org/10.1002/for.1010
Rossiter R (2002) Structural Cointegration Analysis of Private and Public Investment. Int J Bus Econ 1:59–67
Samuelson P (1939) Interactions between the Multiplier Analysis and the Principle of Acceleration. Rev Econ Stat 21:75–78. https://doi.org/10.2307/1927758
Sherman M (2009) A Short History of Financial Deregulation in the United States. Center for Economic and Policy Research. https://www.cepr.net/documents/publications/dereg-timeline-2009-07.pdf. Accessed 28 September 2020.
Stokey NL (2014) Wait-and-see: Investment options under policy uncertainty. Rev Econ Dyn 21:246–265. https://doi.org/10.1016/j.red.2015.06.001
Summers LH (2014) U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. Bus Econ 49:65–73. https://doi.org/10.1057/be.2014.13
Summers LH (2015) Demand side secular stagnation. Am Econ Rev 105:60–65. https://doi.org/10.1257/aer.p20151103
Tevlin S, Whelan K (2003) Explaining the Investment Boom of the 1990s. J Money Credit Bank 35:1. https://doi.org/10.2139/ssrn.221415
Tobin J (1969) A General Equilibrium Approach To Monetary Theory. J Money, Credit Bank 1:15–29. https://doi.org/10.2307/1991374
Yagan D (2015) Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. Am Econ Rev 105:3531–3563. https://doi.org/10.1257/aer.20130098
Yagan D (2017) Employment Hysteresis from the Great Recession. NBER Working Paper 23844. https://doi.org/10.3386/w23844.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Triplett, R., Ozdemir, N. & Mason, P. Structural Change in the Investment Function. J Econ Finan 46, 220–236 (2022). https://doi.org/10.1007/s12197-021-09564-6
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-021-09564-6