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

  • Gallegati, Marco
  • Ramsey, James B.

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0954349X13000209
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Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 25 (2013)
Issue (Month): C ()
Pages: 60-73

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Handle: RePEc:eee:streco:v:25:y:2013:i:c:p:60-73
DOI: 10.1016/j.strueco.2013.02.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/525148

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