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Econometric Modelling of UK Aggregate Investment: The Role of Profits and Uncertainty

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  • Alan Carruth

    ()

  • Andy Dickerson

    ()

  • Andrew Henley

    ()

Abstract

This paper focuses on the determinants of aggregate investment spending in the UK for the industrial and commercial company (ICC) sector. It complements recent work by Cuthbertson and Gasparro (1995), who study an augmented Tobin's q model of investment in the manufacturing sector. Important focal points of our analysis are a role for real profits (internal funds), which allow firms to combat liquidity constraints when access to capital markets is not perfect, Chirinko (1987), and the impact of irreversibility and uncertainty in determining aggregate investment spending. Earlier work on manufacturing investment by Bean (1981a) developed a dynamic, error correction specification based on the flexible accelerator model. Following Cuthbertson and Gasparro we use multivariate cointegration techniques to discover a parsimonious dynamic model, which can explain the 1980s and early 1990s investment experience of the ICC sector. Our results show that a model based on investment and output alone does not cointegrate, and a short-run dynamic model of these variables suffers from heteroscedasticity. This may be consistent with the idea that increased (uncontrolled for) uncertainty has led to increased volatility in investment. The possibility that movements in the real price of gold reflect uncertainty in financial and other traded commodity markets is explored. Investigation of this more general model indicates that real profits and the real price of gold can enhance the explanation of investment spending by the ICC sector.

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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 9812.

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Date of creation: Jul 1998
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Publication status: Forthcoming Manchester School, 2000
Handle: RePEc:ukc:ukcedp:9812

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 764000
Fax: +44 (0)1227 827850
Web page: http://www.ukc.ac.uk/economics/

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Keywords: Aggregate investment; real profits; uncertainty;

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References

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Citations

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Cited by:
  1. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. " What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-53, April.
  2. Muyambiri, Brian & Chiwira, Oscar & Enowbi Batuo, Michael & Chiranga, Ngonidzashe, 2010. "The Causal Relationship between Private and Public Investment in Zimbabwe," MPRA Paper 26671, University Library of Munich, Germany.
  3. Simon Price, 2004. "UK investment and the return to equity: Q redux," Money Macro and Finance (MMF) Research Group Conference 2004 87, Money Macro and Finance Research Group.
  4. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  5. Colin Ellis & Simon Price, 2003. "UK business investment: long-run elasticities and short-run dynamics," Bank of England working papers 196, Bank of England.
  6. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Working Papers 01-16, Bank of Canada.
  7. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
  8. Ciaran Driver & Katsushi Imai & Paul Temple & Giovanni Urga, 2002. "The Effect of Uncertainty on UK Investment Authorisation: Pooled Estimators vs. Heterogeneous Estimators1," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B3-4, International Conferences on Panel Data.

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