Shock-Induced And Trend Investment In Durable Goods

N A Labia

Studies in Economics and Econometrics, 2011, vol. 35, issue 2, 113-131

Abstract: Part I deals with the fundamental problem of combining, as functions of price, the stock demand for a durable good and the flow supply of new units, the rate of increase in stock supply: The analysis deals with investment in an industry where demand is boosted by an unanticipated demand shock. A model is set out in which the criterion for the optimal increase in capital stock is the quantity that maximises capital gain discounted to the time of the investment decision, rather than that of project completion. The model implies simultaneous determination of the desired capital stock and the rate of investment per period. The implications are analysed, particularly in regard to the economic effects of fiscal and monetary policy. The conclusion is that optimal investment is less than that of Tobin’s q model.In Part II the model is based on the assumption of balanced growth in which capital, labour and output grow at the natural rate. The model accepts that capital installation is sporadic and investigates the problem of the optimal quantum of investment and analyses the causal factors involved.

Date: 2011
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DOI: 10.1080/10800379.2011.12097221

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