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The Investment-Finance Link: Investment and U.S. Fiscal Policy in the 1990s

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  • Steven Fazzari

Abstract

In this working paper, Steven Fazzari presents new empirical research that attempts to measure the relative strength of fiscal policy on investment through the cost of capital, firms' financial circumstances, and sales growth. Fazzari argues against the crowding-out effect and claims that even if the connection between the national budget deficit and interest rates is valid, the linkage between interest rates and private sector investment is at best, misguided. While neoclassical empirical studies have found a statistically significant relationship between investment and the cost of capital, Fazzari contends that high degree of explanatory power yielded by many of these investigations is due to the fact that they fail to separate the effects of sales or output growth from the cost of capital in determining investment, which renders the source of their significance unclear. The focus of fiscal policy is therefore difficult to determine.

Suggested Citation

  • Steven Fazzari, 1993. "The Investment-Finance Link: Investment and U.S. Fiscal Policy in the 1990s," Economics Working Paper Archive wp_98, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_98
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    Cited by:

    1. Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, 1994. "Community-based Factoring Companies and Small Business Lending," Economics Working Paper Archive wp_108, Levy Economics Institute.
    2. L. Randall Wray, "undated". "Why Does The Fed Want Slower Growth?," Economics Policy Note Archive 00-7, Levy Economics Institute.
    3. Dimitri B. Papadimitriou & L. Randall Wray, 1996. "The Consumer Price Index As a Measure of Inflation," Economics Working Paper Archive wp_164, Levy Economics Institute.
    4. Neil H. Buchanan, 1996. "Taxes, Saving, and Macroeconomics," Economics Working Paper Archive wp_177, Levy Economics Institute.
    5. Dimitri B. Papadimitriou & L. Randall Wray, 2021. "Still Flying Blind after All These Years: The Federal Reserve's Continuing Experiments with Unobservables," Economics Public Policy Brief Archive ppb_156, Levy Economics Institute.
    6. Daniele Girardi, 2017. "Old and new formulations of the neoclassical theory of aggregate investment : a critical review," UMASS Amherst Economics Working Papers 2017-03, University of Massachusetts Amherst, Department of Economics.

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