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Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis

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  • Gallegati, Marco
  • Ramsey, James B.

Abstract

This paper uses the structural change model and wavelet exploratory analysis to re-examine Tobin's q theory of investment. There are two main results. First, wavelet exploratory analysis provides a useful complementary approach to standard confirmatory statistical analysis. Specifically, using energy and time scale decomposition analyses, we find that the long-run is the dominant scale of variation for both aggregate investment and “measured” Tobin's q, and that for most of the sample there is a stable in-phase relationship between the smooth components of investment rate and q, with q slightly leading investments. Moreover, the analysis of the shift of the phase relationship of the long-term components reveals a “pure” smooth break occurring in the late 1970s, and a “spurious” smooth break in the early 1990s when the two smooth components resume their normal in-phase relationship. Second, when we combine the results from wavelet exploratory analysis and the multiple structural breaks test approach, we find that, contrary to the conventional literature, Tobin's q is an important determinant of aggregate investment, and its estimated coefficient can provide a plausible value for the implied adjustment cost of investment. Most importantly, we discover that the relationship depends on time scale; long time scales are more important than short.

Suggested Citation

  • Gallegati, Marco & Ramsey, James B., 2013. "Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 60-73.
  • Handle: RePEc:eee:streco:v:25:y:2013:i:c:p:60-73
    DOI: 10.1016/j.strueco.2013.02.002
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    Cited by:

    1. Gallegati, Marco & Ramsey, James B., 2014. "The forward looking information content of equity and bond markets for aggregate investments," Journal of Economics and Business, Elsevier, vol. 75(C), pages 1-24.
    2. Gallegati, Marco & Ramsey, James B., 2013. "Bond vs stock market's Q: Testing for stability across frequencies and over time," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 138-150.

    More about this item

    Keywords

    q-Model; Structural breaks; Wavelet exploratory analysis; Phase variation;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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