Some evidence on financial factors in the determination of aggregate business investment for the G7

Pub. Date
28 May, 2001
Pub. Type

Standard theories of investment behaviour have concentrated on the neoclassical and Tobin's Q approaches, with most empirical work on aggregate data focusing on the former. In contrast, a separate literature on monetary transmission, centred on the credit channel and financial accelerator effects, has highlighted the potential impact of credit market imperfections in constraining the investment behaviour of firms. In this paper we present evidence at a macro level for the G7 countries that a broad range of financial variables, consistent with the valuation ratio, financial accelerator and credit channel approaches, are relevant determinants of business fixed investment above those variables normally included in traditional macroeconomic investment functions. The results indicate a wider incidence of these financial effects on investment than the existing literature, focused as it is on the US, would otherwise indicate.