Tobin's q and U.S. inflation
A smaller than 1 Tobin's q has been frequently observed for the postwar U.S. economy. In theory, Tobin's q less than 1 would discourage investment. However, actual capital stock has grown during this period. This paper proposes inflation besides Schumpeterian innovation as an explanation for this apparent paradox. A stylized IS-LM model along the lines of Tobin-Brainard shows that inflation affects Tobin's q. Employing U.S. data from 1953 to 2000, we find a negative strong relationship between Tobin's q and inflation. Vector error correction models (VECM) confirm the long-run relationship and suggest a very fast rate of adjustment to the steady-state in some specifications. Overall, price movements have a long-run negative impact on Tobin's q.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
- Tevlin, Stacey & Whelan, Karl, 2003.
" Explaining the Investment Boom of the 1990s,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 35(1), pages 1-22, February.
- Stacey Tevlin & Karl Whelan, 2000. "Explaining the investment boom of the 1990s," Finance and Economics Discussion Series 2000-11, Board of Governors of the Federal Reserve System (U.S.).
- Karl Whelan & Stacey Tevlin, 2003. "Explaining the investment boom of the 1990s," Open Access publications 10197/202, School of Economics, University College Dublin.
- Karl Whelan & Stacey Tevlin, 2000. "Explaining the investment boom of the 1990s," Open Access publications 10197/245, School of Economics, University College Dublin.
- Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
- Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
- Rapach, David E., 2002. "The long-run relationship between inflation and real stock prices," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 331-351, September.
- James Tobin & William Brainard, 1990. "On Crotty's Critique of q-Theory," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 12(4), pages 543-549, July.
- James R. Crotty, 1990. "Owner-Manager Conflict and Financial Theories of Investment Instability: A Critical Assessment of Keynes, Tobin, and Minsky," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 12(4), pages 519-542, July.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- Rapach, David E. & Wohar, Mark E., 2002. "Testing the monetary model of exchange rate determination: new evidence from a century of data," Journal of International Economics, Elsevier, vol. 58(2), pages 359-385, December.
- Jonas D. M. Fisher, 2006. "The Dynamic Effects of Neutral and Investment-Specific Technology Shocks," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 413-451, June.
- Palley, Thomas I, 2001. "The Stock Market and Investment: Another Look at the Micro-foundations of q Theory," Cambridge Journal of Economics, Oxford University Press, vol. 25(5), pages 657-667, September.
- Yongsung Chang & Jay H. Hong, 2006. "Do Technological Improvements in the Manufacturing Sector Raise or Lower Employment?," American Economic Review, American Economic Association, vol. 96(1), pages 352-368, March.
- Yongsung Chang & Jay H. Hong, 2005. "Do technological improvements in the manufacturing sector raise or lower employment?," Working Papers 05-5, Federal Reserve Bank of Philadelphia.
- Yongsung Chang & Jay H. Hong, 2005. "Do technological improvements in the manufacturing sector raise or lower employment?," Working Paper 05-02, Federal Reserve Bank of Richmond.
- John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Stephen Wright, 2004. "Measures Of Stock Market Value And Returns For The U.S. Nonfinancial Corporate Sector, 1900-2002," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(4), pages 561-584, December.
- Thornton, John, 2008. "Inflation and inflation uncertainty in Argentina, 1810-2005," Economics Letters, Elsevier, vol. 98(3), pages 247-252, March.
- Francis, Neville & Ramey, Valerie A., 2005. "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1379-1399, November.
- Ramey, Valerie A & Francis, Neville, 2002. "Is The Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisted," University of California at San Diego, Economics Working Paper Series qt6x80k3nx, Department of Economics, UC San Diego.
- Andre V. Mollick & Joao R. Faria, 2010. "Capital and labor in thelong-run: evidence fromTobin's q for the US," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 11-14, January.
- Fountas, Stilianos, 2001. "The relationship between inflation and inflation uncertainty in the UK: 1885-1998," Economics Letters, Elsevier, vol. 74(1), pages 77-83, December.
- Stilianos Fountas, 2000. "The Relationship between Inflation and Inflation Uncertainty in the UK: 1885-1998," Working Papers 0048, National University of Ireland Galway, Department of Economics, revised 2000.
- Boudoukh, Jacob & Richardson, Matthew, 1993. "Stock Returns and Inflation: A Long-Horizon Perspective," American Economic Review, American Economic Association, vol. 83(5), pages 1346-1355, December.
- Hess, Patrick J & Lee, Bong-Soo, 1999. "Stock Returns and Inflation with Supply and Demand Disturbances," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1203-1218.
- Richard W. Kopcke & Richard S. Brauman, 2001. "The performance of traditional macroeconomic models of businesses' investment spending," New England Economic Review, Federal Reserve Bank of Boston, pages 3-39.
- Robert W. Dimand, 2004. "James Tobin and the Transformation of the IS-LM Model," History of Political Economy, Duke University Press, vol. 36(5), pages 165-189, Supplemen.
- Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1.
- Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
- Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:62:y::i:5:p:401-418. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.