Firms’ and households’ investment in Italy: the role of credit constraints and other macro factors

Using significantly under-exploited data from institutional sector accounts, we assess the main drivers of both firms’ and households’ investment in Italy over the past two decades. We estimate a vector error correction model separately for firms and for households. Our findings support the existence in both institutional sectors of a long-run equilibrium relationship between investment, income and the user cost of capital, as predicted by the flexible neoclassical model, as well as adjustment dynamics towards the equilibrium level. Moreover, we find evidence that an increase in uncertainty and a decline in economic sentiment have a dampening effect on investment. Furthermore, high indebtedness, measured by financial accounts data, and tight credit constraints, based on survey data for firms, are found to have significantly hindered both firms’ and households’ capital accumulation, again in the short run. This leads us to conclude that studies that disregard the role of debt or financing constraints are unable to fully explain investment dynamics in Italy, especially in the most recent years of sharp contraction.