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The Present Value of Profits and Cyclical Movements in Investment

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  • Andrew B. Abel
  • Olivier J. Blanchard

Abstract

Most of the empirical work on investment is based on the existence of a relation between investment and the expected present val of marginal profits.Thus, in this paper we compute such a present value series, under various assumptions about demand and technology and examine its relation to investment.We find that variations in this present value series are, surprisingly,due more to variations in the cost of capital than to variations in marginal profit. We also find that the present value series, although significantly related to investment, still leaves unexplained a large, serially correlated fraction of investment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1122.

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Date of creation: May 1983
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Publication status: published as Abel, Andrew B. and Olivier J. Blanchard. "The Expected Present Discounted Value of Profits and the Cyclical Variability of Investment," Econometrica, Vol. 54, No. 2, pp. 249-272, March 1986.
Handle: RePEc:nbr:nberwo:1122

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  1. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  2. Blanchard, Olivier J. & Wyplosz, Charles, 1981. "An empirical structural model of aggregate demand," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 1-28.
  3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  4. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
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