Alternatively, policy uncertainty could be mismeasured. It could be that the loan officers respond to uncertainty by tightening conditions. This doesn’t mean that uncertainty doesn’t matter for the long horizon. (If policy uncertainty is taken to be weakly exogenous, then it would account for all of the drop.) Taken literally, about 1/3 of the drop in the investment to capital ratio in 2012Q3 is due to the increase in policy uncertainty in 2012Q2. Augmenting the “financial frictions” specifications with the uncertainty index reduces the estimated responsiveness of the change in the investment-capital ratio to the determinants, and at the same time the coefficient on uncertainty does not show up as significant (except in first differences, just significant at the 10% msl). What about uncertainty? Thanks to the hard work Baker, Bloom and Davis, we have a policy uncertainty index, available here. More importantly, the proportion of variance rises from 0.55 to 0.64. Moreover, adding in the lending conditions produces a coefficient of right sign (investment falls when lending conditions tighten).
I find that for the first two specifications, the change in the log investment to capital ratio responds to the lagged ratio, and that the growth rate of GDP is a statistically important determinant of the ratio. (Note that there are other ways to incorporate financial frictions suggests cash flow would be relevant). Where y is log real GDP, z is the loan officer lending conditions index, and Φ is a measure of uncertainty the regression output is here. I run regressions over the 1990Q4-2012Q3 period, using error correction models based on these specifications: To examine this issue a little more closely, I undertake my own analysis. I find it of interest that policy uncertainty, which some analysts have pointed to as putting a drag on economic activity (including investment), does not make an appearance in this discussion. Briefly, the accelerator links the investment/capital stock data to the change in GDP, the Q model implies the investment ratio is linked to the ratio of market valuation to book value, adjusted for tax provisions, and the financial frictions model in the GS formulation augments the accelerator with a proxy measure for the effect of frictions (namely loan officer report on lending conditions). Two of these models (as well others) are described in this post.
Log horizon coin drop gif drivers#
Source: David Mericle, “The Drivers of Capital Spending,” Goldman Sachs (December 5, 2012). GS provides this graph (note dependent variable is I/K, not log(I/K)): … Our analysis suggests that an improved version of the standard accelerator model that accounts for the availability of credit goes a long way toward explaining recent investment patterns. Second, Tobin’s Q model … is considerably noisier and overpredicts investment during the recovery from the Great Recession much more severely than the other models.įinally, combining the accelerator model with a measure of credit availability captures investment dynamics reasonably well. … The model also substantially overpredicts investment during the last couple of years because it implies that the lagged effect of the sharpest downturn phase of the recession should have passed by now. Our econometric analysis leads us to draw the following conclusions about each class of model:įirst, the accelerator model generally fits well. Goldman Sachs (David Mericle, “The Drivers of Capital Spending, December 5, 2012, not online) notes: Source: BEA, 2012Q3 second release, BEA Table 1.2 (Aug. Net capital stock is annual yearend, interpolated using cubic last match 2012Q1-Q3 extrapolated using regression of first difference of capital stock on investment, 2000-2011. Is there something to this idea? Figure 1 depicts the gross investment to net capital stock.įigure 1: Nonresidential fixed investment, billions of Ch.05$ SAAR (blue line, left scale), and log ratio of fixed investment to net capital stock in Ch.05 (red line, right scale). Some would want to resort to stories of uncertainty. One of the puzzles of the post-crisis period is why investment has been so slow.
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