Investment Cycles

Patrick Francois () and Huw Lloyd-Ellis ()

Macroeconomics from EconWPA

Abstract: It is common amonst macroeconomists to view aggregate investment fluctuations as a rational response to fluctuating incentives, driven by exogenous movements in total factor productivity. However, this approach raises a number of questions. Why treat investments in physical capital as endogenous, while treating those in intangible capital as exogenous? Relatedly, why would productivity changes exhibit such strong co- movement across diverse sectors of the economy, and why are the short- run, empirical relationships between aggregate investment and measures of investment incentives, such as Tobin's Q, so weak? We address these and other related issues using a model of 'implementation cycles' that incorporates physical capital. In doing so, we demonstrate the crucial role played by endogenous innovation and incomplete contracting, inherent to the process of creative destruction.

Keywords: Inflexibility of installed capital; Tobin's Q; recessions; endogenous cycles and growth (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2004-05-05, Revised 2004-05-05
Note: Type of Document - pdf; pages: 48.
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0405005

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