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The Investment Function: Determinants Of Demand For Investment Goods


  • John J. Heim

    () (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)


This paper seeks to identify the major factors that affect the demand for investment goods in the United States. A review of Keynes’ theoretical literature on investment and previous empirical studies identified eight possible variables for testing. The testing procedure was stepwise linear regression. Hypothesized determinants of investment were added one by one to a regression equation to measure their ability to explain variance, and to test for the stability of their regression coefficients. Single stage or two stage least squares regression was used, as appropriate. The following, in order of importance, were found to be significant determinants of investment demand during the1960 – 2000 period: 1) crowd out problems caused by government deficits, 2) available depreciation allowances, 3) rates of growth of the economy, 4) changes in the prime interest rate, 5) growth in stock values, 6) exchange rate changes and 7) company profitability. The results explained 90% of the variation in investment demand. Regressions missing important explanatory variables had regression coefficients that varied widely with even small changes to the model. More complete models had more stable coefficients.

Suggested Citation

  • John J. Heim, 2008. "The Investment Function: Determinants Of Demand For Investment Goods," Rensselaer Working Papers in Economics 0806, Rensselaer Polytechnic Institute, Department of Economics.
  • Handle: RePEc:rpi:rpiwpe:0806

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    Cited by:

    1. Georgy Idrisov, 2010. "Factors of Demand for Imported Goods for Investment Purpose to Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 138P.
    2. Ali, Sharafat, 2013. "A Cointegration Approach to Estimate Private Investment Demand Function of Pakistan," MPRA Paper 49595, University Library of Munich, Germany, revised 02 Sep 2113.
    3. ADETILOYE Kehinde Adekunle, 2013. "The National Housing Fund, Mortgage Finance and Capital Formation in Nigeria," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 3(7), pages 43-53, July.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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