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Investment Cycles

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Author Info
Patrick Francois (University of British Columbia)
Huw Lloyd-Ellis (Queen's University)

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Abstract

It is common amonst macroeconomists to view aggregate investment fluctuations as a rational response to fluctuating incentives, driven by exogenous movements in total factor productivity. However, this approach raises a number of questions. Why treat investments in physical capital as endogenous, while treating those in intangible capital as exogenous? Relatedly, why would productivity changes exhibit such strong co- movement across diverse sectors of the economy, and why are the short- run, empirical relationships between aggregate investment and measures of investment incentives, such as Tobin's Q, so weak? We address these and other related issues using a model of 'implementation cycles' that incorporates physical capital. In doing so, we demonstrate the crucial role played by endogenous innovation and incomplete contracting, inherent to the process of creative destruction.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0405005.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 48 pages
Date of creation: 05 May 2004
Date of revision: 05 May 2004
Handle: RePEc:wpa:wuwpma:0405005

Note: Type of Document - pdf; pages: 48.
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Web page: http://129.3.20.41

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Related research
Keywords: Inflexibility of installed capital; Tobin's Q; recessions; endogenous cycles and growth;

Find related papers by JEL classification:
E - Macroeconomics and Monetary Economics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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