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Autonomous Demand and the Investment Share

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  • Daniele Girardi

    () (Department of Economics, University of Massachusetts, Amherst)

  • Riccardo Pariboni

    () (Department of Economics, Roma Tre University)

Abstract

This paper looks at the effect of demand shocks on the investment share of the economy. Using panel data on 20 OECD countries, we show that the rate of growth of autonomous demand (exports, public spending and housing investment) is positively correlated with subsequent values of the share of business investment in GDP. By means of an instrumental-variables strategy, we confirm a positive effect of demand dynamics on the business investment share. We instrument autonomous demand with US demand for imports interacted with exposure to trade with the US, openness to trade of a country’s main export destinations, and military spending. A permanent 1% increase in autonomous demand growth raises the investment share by 1.5 to 1.9 percentage points of GDP in our preferred panel IV specification. Our results provide empirical support for the view that the influence of aggregate demand on capital accumulation can be a major source of hysteresis. Our results are inconsistent with the canonical New Keynesian 3-equations model, the Neo-Kaleckian model with flexible equilibrium utilization and Classical-Marxian growth models. A positive influence of autonomous demand on the investment share is instead compatible with demand-led models in which capacity adjusts to demand in the long-run.

Suggested Citation

  • Daniele Girardi & Riccardo Pariboni, 2018. "Autonomous Demand and the Investment Share," UMASS Amherst Economics Working Papers 2018-18, University of Massachusetts Amherst, Department of Economics.
  • Handle: RePEc:ums:papers:2018-18
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    Cited by:

    1. Matteo Deleidi & Walter Paternesi Meloni & Antonella Stirati, 2018. "Structural change, labour productivity and the Kaldor-Verdoorn law: evidence from European countries," Departmental Working Papers of Economics - University 'Roma Tre' 0239, Department of Economics - University Roma Tre.
    2. Fabrizio Antenucci & Matteo Deleidi & Walter Paternesi Meloni, 2019. "Demand and Supply-side Drivers of Labour Productivity Growth: an empirical assessment for G7 countries," Working Papers 0042, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.

    More about this item

    Keywords

    Hysteresis; Investment; Demand-led Growth; Capacity Adjustment; Supermultiplier;

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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