Tobin's q and U.S. inflation

Joao Ricardo Faria () and Andre V. Mollick ()

Journal of Economics and Business, 2010, vol. 62, issue 5, pages 401-418

Abstract: A smaller than 1 Tobin's q has been frequently observed for the postwar U.S. economy. In theory, Tobin's q less than 1 would discourage investment. However, actual capital stock has grown during this period. This paper proposes inflation besides Schumpeterian innovation as an explanation for this apparent paradox. A stylized IS-LM model along the lines of Tobin-Brainard shows that inflation affects Tobin's q. Employing U.S. data from 1953 to 2000, we find a negative strong relationship between Tobin's q and inflation. Vector error correction models (VECM) confirm the long-run relationship and suggest a very fast rate of adjustment to the steady-state in some specifications. Overall, price movements have a long-run negative impact on Tobin's q.

Keywords: Inflation; Investment; Tobin's; q (search for similar items in EconPapers)
Date: 2010
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