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Tobin's q and U.S. inflation

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  • Faria, Joao Ricardo
  • Mollick, Andre Varella

Abstract

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.

Suggested Citation

  • Faria, Joao Ricardo & Mollick, Andre Varella, 2010. "Tobin's q and U.S. inflation," Journal of Economics and Business, Elsevier, vol. 62(5), pages 401-418, September.
    • Handle: RePEc:eee:jebusi:v:62:y::i:5:p:401-418
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    1. Faria, João Ricardo & Mollick, André Varella & Sachsida, Adolfo & Wang, Le, 2012. "Do central banks affect Tobin's q?," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 1-10.

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