Tobin's q and U.S. inflation
A smaller than 1 Tobin's q has been frequently observed for the postwar U.S. economy. In theory, Tobin's q less than 1 would discourage investment. However, actual capital stock has grown during this period. This paper proposes inflation besides Schumpeterian innovation as an explanation for this apparent paradox. A stylized IS-LM model along the lines of Tobin-Brainard shows that inflation affects Tobin's q. Employing U.S. data from 1953 to 2000, we find a negative strong relationship between Tobin's q and inflation. Vector error correction models (VECM) confirm the long-run relationship and suggest a very fast rate of adjustment to the steady-state in some specifications. Overall, price movements have a long-run negative impact on Tobin's q.
Year of publication: |
2010
|
---|---|
Authors: | Faria, Joao Ricardo ; Mollick, Andre Varella |
Published in: |
Journal of Economics and Business. - Elsevier, ISSN 0148-6195. - Vol. 62.2010, 5, p. 401-418
|
Publisher: |
Elsevier |
Subject: | Inflation Investment Tobin's q |
Saved in:
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