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Investment Cycles

Author

Listed:
  • Patrick Francois

    (University of British Columbia)

  • Huw Lloyd-Ellis

    (Queen's University)

Abstract

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.

Suggested Citation

  • Patrick Francois & Huw Lloyd-Ellis, 2004. "Investment Cycles," Macroeconomics 0405005, EconWPA, revised 05 May 2004.
  • Handle: RePEc:wpa:wuwpma:0405005 Note: Type of Document - pdf; pages: 48.
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    References listed on IDEAS

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    Keywords

    Inflexibility of installed capital; Tobin's Q; recessions; endogenous cycles and growth;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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