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Fixed Investment in the American Business Cycle, 1919-83

In: The American Business Cycle: Continuity and Change

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  • Robert J. Gordon
  • John Veitch

Abstract

Contributions are made by this paper in three areas, methodological, data creation, and empirical. The methodological section finds that, while structural model building exercises may be useful in suggesting lists of variables that may play an explanatory role in investment equations, they generally achieve identification of structural parameters only by imposing arbitrary and unbelievable simplifying assumptions and exclusion restrictions.The paper advocates a hybrid methodology combining guidance from traditional structural models on the choice and form of explanatory variables to be included, with estimation in a reduced-form format that introduces all explanatory variables and the lagged dependent variable with the same number of unconstrained lag coefficients. The second contribution is the use of a new set of quarterly data for major expenditure categories of GNP extending back to 1919. The data file also contains quarterly data back to 1919 for other variables, including the capital stock, interest rates, the cost of capital including tax incentive effects, a proxy for Tobin's "Q", and the real money supply.The empirical results support the view that there are two basic impulses in the business cycle, real and financial.The real impulse appears in our statistical evidence as an autonomous innovation to investment in structures. We interpret these structures innovations as due in turn to changes in the rate of population growth, episodes of speculation and overbuilding, and Schumpeterian waves of innovation.The financial impulse works through the effect on investment of changes in the money supply, as well as the real interest rate (in the case of postwar investment in durable equipment).There is a strong role for the money supply as a determinant of investment behavior, relative to such other factors as the user cost of capital or Tobin's "Q". The role of the money supply is interpreted as primarily reflecting the banking contraction of 19
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Suggested Citation

  • Robert J. Gordon & John Veitch, 1986. "Fixed Investment in the American Business Cycle, 1919-83," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 267-358, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:10025
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    Cited by:

    1. Victor Zarnowitz, 1987. "The Regularity of Business Cycles," NBER Working Papers 2381, National Bureau of Economic Research, Inc.
    2. F. Bacchini & M. E. Bontempi & R. Golinelli & C. Jona Lasinio, 2014. "ICT and Non-ICT investments: short and long run macro dynamics," Working Papers wp956, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Michael Ball, 2003. "Is there an office replacement cycle?," Journal of Property Research, Taylor & Francis Journals, vol. 20(2), pages 173-189, January.
    4. Mark Gertler & R. Glenn Hubbard & Anil Kashyap, 1991. "Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation," NBER Chapters, in: Financial Markets and Financial Crises, pages 11-32, National Bureau of Economic Research, Inc.
    5. Loungani, Prakash & Rush, Mark, 1995. "The Effect of Changes in Reserve Requirements on Investment and GNP," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 511-526, May.
    6. Louis Amato & Christie Amato, 2001. "The Effects of Global Competition on Total Factor Productivity in U.S. Manufacturing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 19(4), pages 405-421, December.
    7. John B. Guerard, 2024. "Sir David Hendry: An Appreciation from Wall Street and What Macroeconomics Got Right," Working Papers 2024-001, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting, revised Feb 2024.
    8. Cooper, Russell & Ejarque, Joao, 1995. "Financial intermediation and the Great Depression: a multiple equilibrium interpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 285-323, December.
    9. Riccardo DiCecio, 2004. "Comovement: it's not a puzzle," 2004 Meeting Papers 113, Society for Economic Dynamics.
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    11. Elbadawi, Ibrahim A, 1990. "The Sudan Demand for International Reserve: A Case of a Labour-Exporting Country," Economica, London School of Economics and Political Science, vol. 57(225), pages 73-89, February.
    12. Jon D. Wisman, 2013. "Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson," Working Papers 2013-07, American University, Department of Economics.
    13. J. Peter Ferderer, 1994. "Credibility of the Interwar Gold Standard, Uncertainty, and the Great Depression," Economics Working Paper Archive wp_102, Levy Economics Institute.
    14. Giovanni Bonifati, 2014. "Investimenti, consumi e occupazione. Capacità produttiva, domanda effettiva e distribuzione del reddito nel lungo periodo," Department of Economics 0046, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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