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Explaining the Recent Slump in Investment: the Role of Expected Demand and Uncertainty

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  • M. Bussière
  • L. Ferrara
  • J. Milovich

Abstract

The recent weakness in business investment among advanced economies has revived interest in investment models and opened a debate on the main drivers of the “investment slump” and what the policy response should be – if any. In particular, it is essential to assess precisely whether the investment slump stems mostly from weak aggregate demand, financial constraints or uncertainty, as these different explanatory factors have different policy implications. This paper presents an empirical investigation of the main determinants of business investment for a panel of 22 advanced economies. The main contribution is that we present results from an augmented accelerator model using vintage forecast data as a measure of expected demand and show that this forward-looking variable goes a long way in explaining the weakness in investment since the Global Financial Crisis. Moreover, our results also underline the importance of uncertainty, whereas measures of capital cost seem to play a more modest role. Finally, we show that systematically over-optimistic GDP growth forecasts since 2008 have supported business investment to a large extent.

Suggested Citation

  • M. Bussière & L. Ferrara & J. Milovich, 2015. "Explaining the Recent Slump in Investment: the Role of Expected Demand and Uncertainty," Working papers 571, Banque de France.
  • Handle: RePEc:bfr:banfra:571
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    References listed on IDEAS

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    Cited by:

    1. Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2016. "Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel," Post-Print hal-01667093, HAL.
    2. repec:bfr:rueban:2017:44 is not listed on IDEAS
    3. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    4. Matthieu Bussière & Laurent Ferrara & Juliana Milovich, 2017. "Explaining the recent slump in investment: the role of expected demand and uncertainty," Rue de la Banque, Banque de France, issue 44, may..
    5. Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2016. "Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel," Post-Print hal-01667093, HAL.
    6. Laurent Ferrara & Stéphane Lhuissier & Fabien Tripier, 2017. "Uncertainty Fluctuations: Measures, Effects and Macroeconomic Policy Challenges," CEPII Policy Brief 2017-20, CEPII research center.
    7. Rose Cunningham & Christian Friedrich & Kristina Hess & Min Jae Kim, 2017. "Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices," Discussion Papers 17-12, Bank of Canada.
    8. Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2016. "Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel," Post-Print hal-01667093, HAL.
    9. Gutierrez, German & Philippon, Thomas, 2017. "Declining Competition and Investment in the U.S," CEPR Discussion Papers 12536, C.E.P.R. Discussion Papers.
    10. Maxime Leboeuf & Robert Fay, 2016. "What Is Behind the Weakness in Global Investment?," Discussion Papers 16-5, Bank of Canada.
    11. Jean-Charles Bricongne & Aurora Mordonu, 2017. "Interlinkages Between Household and Corporate Debt in Advanced Economies," Open Economies Review, Springer, vol. 28(5), pages 1029-1055, November.
    12. Kim Sujin, 2018. "Investment Puzzle: Deeper Roots," Working Papers id:12433, eSocialSciences.
    13. repec:wfo:wstudy:59156 is not listed on IDEAS
    14. Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2016. "Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel," Post-Print hal-01667097, HAL.
    15. Lawless, Martina & O’Toole, Conor & Slaymaker, Rachel, 2018. "Estimating an SME investment gap and the contribution of financing frictions," Papers WP589, Economic and Social Research Institute (ESRI).
    16. Leslie G. Manison & Savvakis C. Savvides, 2016. "Towards Sustainable Growth: Rebuilding the Foundations of the Cyprus Economy," Development Discussion Papers 2016-07, JDI Executive Programs.

    More about this item

    Keywords

    Business investment; aggregate demand; expectations; uncertainty; financial frictions; macroeconomic forecasts.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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