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Redirect investment to stimulate the economy

Author

Listed:
  • Meijers, Huub

    (RS: GSBE MORSE, RS: GSBE other - not theme-related research, Macro, International & Labour Economics, Mt Economic Research Inst on Innov/Techn)

  • Muysken, Joan

    (RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: GSBE - MACIMIDE)

Abstract

Investment has been low in the last decades (both by firms and by government). This does not only hold for fixed capital including R&D, but also for investment in climate, housing, infrastructure and education. Productivity has been low too and should be stimulated, as is elaborated in the Draghi report. A problem is that firms invest a considerable part of their savings in financial assets abroad. Moreover, assets held by banks and pension funds are mainly invested in mortgages and financial assets abroad. In this paper we analyse scenarios were banks, pension funds, and firms redirect part of their financial investments to investment in fixed capital and government investment. Next to demand effects this output growth is induced by productivity growth, in which productive government investment also plays a role. Finally, inflationary tendencies are controlled by wage and price policies. We elaborate these points for the Dutch economy. This economy is characterised by several stylised facts which constitute a highly interdependent framework: (1) households with positive savings, large pension claims and a huge mortgage debt; (2) firms with large positive savings and large financial claims abroad; (3) a large financial sector with assets mainly invested in mortgages and abroad; (4) a large trade balance surplus; (5) a Central Bank owning a large stock of Dutch government bonds; (6) a government with modest negative savings and a moderate debt; and (7) a centralised system of wage negotiations. In the paper we use an open economy post-Keynesian stock-flow consistent model with a welldeveloped financial sector. Next to the banking sector we distinguish a pension fund which invests to a large extent abroad. Firms invest a considerable part of their retained earnings abroad in financial assets. We also introduce an inflationary process, based on conflict inflation, which allows for external inflation shocks. The model recognises the balance sheets and portfolios of financial assets of the six sectors in the model – the prices of these assets are explicitly modelled. The financial flows leading to wealth changes are analysed and both wealth effects and transmission channels for the impact of monetary policy play an important role. Finally, productivity growth is affected by both private and government investment in a variant of Verdoorn’s Law. We estimate the model, using quarterly stock-flow consistent data for the Dutch economy. This enables us to reproduce the stylised facts presented above. From simulations with our model, we show the positive effects of redirecting investment to stimulate the economy. We also find a rebound effect if these redirected investments are discontinued.

Suggested Citation

  • Meijers, Huub & Muysken, Joan, 2026. "Redirect investment to stimulate the economy," MERIT Working Papers 003, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    • Handle: RePEc:unm:unumer:2026003
    DOI: 10.53330/EPZP7795
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    References listed on IDEAS

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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