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A post-Keynesian theory for Tobin's q in a stock-flow consistent framework

Listed author(s):
  • Javier Lopez Bernardo
  • Engelbert Stockhammer
  • Felix Lopez Martinez

The paper proposes a post-Keynesian framework to explain Tobin’s q behaviour in the long run. The theoretical basis is informed by the Cambridge corporate model originally proposed by Kaldor (1966), which is reinterpreted here as a theory for q. The core of the ‘Kaldorian q theory’ is a negative long-run relation between q and growth rates, a negative relation between q and propensities to consume, and the fact that q can be different from 1 in the long-run equilibrium. We generalise this model through a medium-scale Stock-Flow Consistent (SFC) model, which introduces important post-Keynesian aspects missing in the Kaldorian model, such as endogenous money, a financial system and inflation. We extend the model to include a more realistic treatment of firms’ financial structure decisions and allow the interdependence between these decisions and dividend policy. Numerical simulations confirm that the original Kaldorian relations between q and growth rates and propensities to consume hold, but unlike the original model, in our model q is not independent of how firms finance their investment. We also confirm the possibility of q being different from 1 in the long-run. Finally, we contrast this ‘post-Keynesian q theory’ with the Miller-Modigliani dividend irrelevance proposition and the neoclassical investment and financial theory. It is shown that its validity depends crucially on the value taken by q: for q values different from 1 the proposition will not hold and dividend policy will be relevant for equity valuation. Therefore, post-Keynesian q theory stands against the main predictions of mainstream finance and constitutes an alternative for developing a macroeconomic theory for equity markets.

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File URL: http://www.postkeynesian.net/downloads/working-papers/PKWP1509_cSPYRSG.pdf
File Function: First version, 2015
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Paper provided by Post Keynesian Economics Study Group (PKSG) in its series Working Papers with number PKWP1509.

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Length: 30
Date of creation: Jul 2015
Handle: RePEc:pke:wpaper:pkwp1509
Contact details of provider: Web page: http://www.postkeynesian.net

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