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A Note on Aggregate Investment in Australia

Author

Listed:
  • Warwick J. McKibbin

    (Reserve Bank of Australia)

  • Eric S. Siegloff

    (Reserve Bank of Australia)

Abstract
Investment plays an important role in influencing short-term aggregate demand and in determining the long-run growth potential of the economy. Despite the current debate concerning the potential problem of low investment, there have been few recent empirical studies of aggregate investment in Australia. The purpose of this paper is to explore the relevance of Tobin’s “q theory” of investment in explaining aggregate investment in Australia, over the period from December 1966 to December 1986. The first part of the paper derives a q theory of investment behaviour based on a model of an optimising firm facing costs to adjusting its capital stock. The second part of the paper explores the empirical relevance of the theory. In testing the q theory we relax the implicit assumption that firms have unlimited access to capital markets, allowing a proportion of aggregate investment to be determined by current profits. Using standard capital stock data, the q theory performs poorly. However, the cost of adjustment model implies that the conventional capital stock data needs to be revised to allow for these adjustment costs. Once this is done, it is found that the q theory is empirically supported. For plausible values of the cost of adjustment, the results indicate that a lower bound of 10 percent of aggregate investment is explained by q theory and 90 per cent by current profits.

Suggested Citation

  • Warwick J. McKibbin & Eric S. Siegloff, 1987. "A Note on Aggregate Investment in Australia," RBA Research Discussion Papers rdp8709, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp8709
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    File URL: https://www.rba.gov.au/publications/rdp/1987/8709.html
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    References listed on IDEAS

    as
    1. A. B. Treadway, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(2), pages 227-239.
    2. Stegman, Trevor R, 1982. "The Estimation of an Accelerator-Type Investment Function with a Profitability Constraint, by the Technique of Switching Regressions," Australian Economic Papers, Wiley Blackwell, vol. 21(39), pages 379-391, December.
    3. Jeffrey Carmichael & Nigel Dews, 1987. "The Role and Consequences of Investment in Recent Australian Economic Growth," RBA Research Discussion Papers rdp8704, Reserve Bank of Australia.
    4. George M. Von Furstenberg, 1977. "Corporate Investment: Does Market Valuation Matter in the Aggregate?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 347-408.
    5. repec:bla:ecorec:v:62:y:1986:i:179:p:451-67 is not listed on IDEAS
    6. Ulrich Kohli & Christopher J. Ryan, 1986. "Australian Business Investment: A New Look at the Neoclassical Approach," The Economic Record, The Economic Society of Australia, vol. 62(4), pages 451-467, December.
    7. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    8. McKibbin, Warwick J, 1988. "Policy Analysis with the MSG2 Model," Australian Economic Papers, Wiley Blackwell, vol. 27(0), pages 126-150, Supplemen.
    9. Malcolm L. Edey & Elaine J. Kerrison & Gordon D. Menzies, 1987. "Transmission of External Shocks in the RBII Model," RBA Research Discussion Papers rdp8710, Reserve Bank of Australia.
    10. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75(4), pages 321-321.
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    Cited by:

    1. Bruce F. Parsell & Alan A. Powell & Peter J. Wilcoxen, 1989. "The Reconciliation of Computable General Equilibrium and Macroeconomic Modelling: Grounds for Hope?," Centre of Policy Studies/IMPACT Centre Working Papers ip-44, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. Guest, Ross S. & McDonald, Ian M., 2001. "The volatility of the socially optimal level of investment," Journal of Policy Modeling, Elsevier, vol. 23(8), pages 901-928, November.
    3. Karen Mills & Steven Morling & Warren Tease, 1994. "Balance Sheet Restructuring and Investment," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 27(1), pages 83-100, January.
    4. Ross Guest & Ian McDonald, 1998. "The Socially Optimal Level of Saving in Australia, 1960‐61 to 1994‐95," Australian Economic Papers, Wiley Blackwell, vol. 37(3), pages 213-235, September.
    5. Guest, Ross & McDonald, Ian, 1999. "An evaluation of the saving, investment, and current account balances of five ASEAN economies," Journal of Asian Economics, Elsevier, vol. 10(3), pages 445-464.
    6. John B. Burbddge & William M. Scarth & Peter J. Stemp, 1994. "Saving, Investment and Current Account Dynamics," The Economic Record, The Economic Society of Australia, vol. 70(211), pages 397-407, December.
    7. Karen Mills & Steven Morling & Warren Tease, 1994. "The Influence of Financial Factors on Corporate Investment," RBA Research Discussion Papers rdp9402, Reserve Bank of Australia.
    8. Ben J. Heudra & William M. Scarth, 1990. "Investment Spending in Australia: Further Study and Interpretation," The Economic Record, The Economic Society of Australia, vol. 66(4), pages 295-307, December.

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