How Resilient Is the Investment Climate in Australia? Unpacking the Driving Factors

A resilient economy is the ultimate aspiration of Government authorities and legislators. Economic recovery, one of the cornerstones of economic resilience, measures the speed at which a system recovers from an exogenous and adverse shock. This paper focuses on the resilience of private sector investment within Australia to test its adaptability and absorbability against external shocks. This paper utilises a Kaleckian-Post Keynesian approach to investment, whereby capacity utilisation, profit share, interest rates, and productivity growth are contributing factors. Research, however, has provided evidence that the incorporation of financial development and fiscal policy within the investment model has been largely ignored within the literature. Accordingly, this paper incorporates such indicators to capture their role in modelling approaches. Using annual historical data from 1980 to 2015, this paper adopts a Vector Error Correction Model (VECM), Impulse Response Functions (IRF) and Variance Decompositions (VD) to examine investment’s resilience against external disturbances. Results show that both long and short-run unidirectional causality between investment and the explanatory variables was evident, by identifying cointegrating vectors. The results confirm that government expenditure is the more powerful mechanism of the two, suggesting that a permanent incorporation into the model should be taken seriously. A simulated onetime shock upon the explanatory variables towards investment shows volatile and positive long-lasting reactions, with no sign of returning to pre-shock levels in the long-run. The results showed the changes in profit and the private sector’s productive capacity are the most important indicators capable of explaining variations in private sector investment decisions in Australia.