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Neoclassical Theory and Australian Business Investment: A Reappraisal

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  • U.R. Kohli

    (Reserve Bank of Australia)

  • C.J.Ryan

    (Reserve Bank of Australia)

Abstract

This paper provides an attempt to reconcile neoclassical theory with Australian investment data. We argue that, by focusing almost exclusively on the demand for capital services, neoclassical investment theory neglects two related decisions: the decision to own the existing capital stock, and the decision to produce new capital goods. We propse a simple model of investment behaviour that integrates production decisions with portfolio decisions. Careful consideration is given to the determination of the price of capital, the rental price of capital, and the return on capital. The model is estimated by FIML, and a number of simulation results are reported.

Suggested Citation

  • U.R. Kohli & C.J.Ryan, 1985. "Neoclassical Theory and Australian Business Investment: A Reappraisal," RBA Research Discussion Papers rdp8501, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp8501
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