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Time-varying Investment Dynamics in the USA

Author

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  • Mendieta-Muñoz Ivan

    (Department of Economics, University of Utah, Salt Lake City, United States of America)

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 a 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. Thus, the time-varying response of investment to a shock to Tobin’s q has been almost the mirror image to the time-varying response of investment to a shock to cash flow. This implies that Tobin’s q and cash flow represent both complementary and alternative sources of information needed to understand short-run investment behavior.

Suggested Citation

  • Mendieta-Muñoz Ivan, 2024. "Time-varying Investment Dynamics in the USA," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 18(1), pages 1-18.
    • Handle: RePEc:bpj:econoa:v:18:y:2024:i:1:p:18:n:1035
    DOI: 10.1515/econ-2022-0091
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    References listed on IDEAS

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    More about this item

    Keywords

    investment dynamics; Tobin’s q; cash flow; time-varying parameters; vector autoregression;
    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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