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Investment Cycles

  • Patrick Francois

    (University of British Columbia)

  • Huw Lloyd-Ellis

    (Queen's University)

It is common amonst macroeconomists to view aggregate investment fluctuations as a rational response to fluctuating incentives, driven by exogenous movements in total factor productivity. However, this approach raises a number of questions. Why treat investments in physical capital as endogenous, while treating those in intangible capital as exogenous? Relatedly, why would productivity changes exhibit such strong co- movement across diverse sectors of the economy, and why are the short- run, empirical relationships between aggregate investment and measures of investment incentives, such as Tobin's Q, so weak? We address these and other related issues using a model of 'implementation cycles' that incorporates physical capital. In doing so, we demonstrate the crucial role played by endogenous innovation and incomplete contracting, inherent to the process of creative destruction.

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Paper provided by EconWPA in its series Macroeconomics with number 0405005.

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Length: 48 pages
Date of creation: 05 May 2004
Date of revision: 05 May 2004
Handle: RePEc:wpa:wuwpma:0405005
Note: Type of Document - pdf; pages: 48.
Contact details of provider: Web page: http://econwpa.repec.org

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