@article{Implications:4242,
      recid = {4242},
      author = {Scotland, Francis},
      title = {Investment: A Survey of Models with Some Implications for  the Effects of Monetary Policy},
      publisher = {Bank of Canada},
      address = {1981},
      pages = {1 online resource (ix, 54 pages)},
      abstract = {Investment is one of several linkages through which  monetary policy may influence the economy. The nature of  the presumed linkage has been defined in various theories  of investment, each apparently emphasizing a different  channel of influence. It is useful, therefore, to  understand the differences among the theories by assessing  their strengths and weaknesses from both theoretical and  empirical points of view, in order to arrive at a clearer  understanding of the issues involved in determining the  impact of monetary policy on aggregate demand. The four  models of investment surveyed in this report, chosen on the  basis of popularity and vintage, are the accelerator, the  cash flow, the securities valuation or Tobin's q, and the  standard neoclassical models. Briefly, the accelerator  model attributes variations in net investment to movements  in the demand for output and disregards direct sensitivity  to monetary or fiscal parameters. The cash flow model  points to corporate profits and depreciation allowances as  the major driving force behind investment demand. The  securities valuation or Tobin's q model indicates that the  driving force of investment is the market value of the real  capital stock (as determined in the securities market)  relative to its replacement value. In this model, monetary  factors affect investment via their effect on the valuation  of capital in the stock market. The standard neoclassical  model suggests two possible investment specifications, (a)  as a function of output and relative factor prices, and (b)  as a function of output and the relative prices of output  and capital. Under specific conditions the two  specifications are theoretically equivalent. In this model  the implicit rental price of capital is defined to be a  function of a number of policy levers, including the  discount rate, thus providing a direct linkage to monetary  policy. These investment models are surveyed in a fashion  similar to U.S. studies by Charles Bischoff and Peter  Clark; that is, they are compared on the basis of  motivating theory, estimation properties, intra- and  extra-sample simulation performance and their implications  for the effects of monetary policy. The empirical findings  of the survey indicate that there is not much difference  among the models when they are assessed on their ability to  track investment. When their theoretical properties are  compared, however, the standard neoclassical model is found  to be the most appropriate framework for determining the  effects of monetary policy on investment as well as for  future research. The survey does not explore at least two  important issues: the effect on investment of inflation and  uncertainty and the impact of the rise in energy prices.  These issues represent, in themselves, major research  projects.},
      url = {http://www.oar-rao.bank-banque-canada.ca/record/4242},
      doi = {https://doi.org/10.34989/tr-29},
}