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Time-varying investment dynamics in the USA

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  • Ivan Mendieta-Muñoz

Abstract

We study the time-varying effects of Tobin’s q and cash flow on investment dynamics in the USA using a vector autoregression model with drifting parameters and stochastic volatilities estimated via Bayesian methods. We find significant variation over time of the response of investment to shocks in both variables. The time-varying sensitivity of investment to a shock in Tobin’s q (cash flow) decreased (increased) since the early 1960s through the early 1980s, increased (decreased) since the early 1980s through the early 2000s, and it has decreased (increased) importantly again since then. Our results show that, although Tobin’s q and cash flow are complementary sources of information for investment decisions, their relative importance for investment dynamics has varied considerably over time, so both variables also represent alternative sources of information for short-run fluctuations in investment.

Suggested Citation

  • Ivan Mendieta-Muñoz, 2024. "Time-varying investment dynamics in the USA," Working Paper Series, Department of Economics, University of Utah 2024_01, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2024_01
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    File URL: https://economics.utah.edu/research/publications/2024-02.pdf
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    References listed on IDEAS

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    1. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(3), pages 361-393.
    2. Fabio Verona, 2020. "Investment, Tobin's Q, and Cash Flow Across Time and Frequencies," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(2), pages 331-346, April.
    3. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investment dynamics; Tobin’s q; cash flow; time-varying parameters; vector autoregression; stochastic volatility JEL Classification: C11; C32; E22; E32; G31;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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