Q, investment, and the financial cycle

Fabio Verona

No 26/2017, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: The empirical performance of the Q theory of investment can be significantly improved by simultaneously considering the time- and the frequency-varying features of the investment-Q relationship. Using continuous wavelet tools, I assess the investment-Q sensitivity at different frequencies and its evolution over time, as well as the interaction of the financial cycle with the Q theory. The results show that there is a positive, stable medium-to-long-run relationship between investment and Q that begins after a positive, stable long-run relationship between credit and Q materializes. In such case, credit leads and slowly fuels the stock price boom.

JEL-codes: C49 E22 G31 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2017_026

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