Thursday, October 26, 2017


Dietz Vollrath examines a paper by German Gutierrez and Thomas Philippon about "Investment-less Growth" asking "Where did all the investment go?" The question that's actually being asked (since FPI and even RFPI are in fact at all time highs) is why investment is so low relative to profits. In the end Gutierrez and Philippon connect at least in part to a complex function of market power (that I've discussed before).

The question I'd like to ask is what baseline should we be looking at? Investment is very volatile (fluctuating strongly through the business cycle), but there appears to be an underlying dynamic equilibrium — much like what happens in the previous couple of posts on real growth and wage growth:

Fixed private investment (FPI) is deflated using the GDP deflator like in the real growth post.

In this picture, we seem to have exactly the same picture we have with NGDP with two major shocks. We could potential describe both shocks in terms of the same demographic effects: women entering the workforce and Baby Boomers leaving/retiring after the Great Recession:

In fact, to a good approximation NGDP ~ FPI (a fact that I use in the information equilibrium version of the IS-LM model):

The above graph shows the FPI model scaled to match NGDP. The transitions (vertical lines) happen in roughly the same place (FPI's transitions are much narrower, however).

So is investment really a different metric from NGDP? Are the reasons FPI is what it is today different from the reasons NGDP is what it is today? Or is investment just given by something proportional to NGDP with an exaggerated business cycle? This doesn't conclusively answer this question, but it does act as a bit of an Occam's Razor: G&P's paper is quite a robust work at 94 pages long but "long run investment is proportional to GDP" captures the data more accurately with many fewer parameters (and no assumptions about e.g. firm behavior).

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