This article examines trends in business investment in Ireland. Consistent with the international evidence on investment cycles, we show that business investment in Ireland exhibits large cyclical movements around a long-run trend relative to GDP. Changes in business investment broadly coincide with the overall business cycle, although swings in investment tend to be far greater, with extended periods of both over- and under-investment relative to GDP. The sharp fall in business investment since 2007 is largely explained by both the rapid slowdown and subsequent fall in GDP growth, and the previous cycle of over-investment which resulted in an elevated business investment to GDP ratio relative to the long-run trend. We look at the importance of the various factors driving investment using a simple econometric model. The model indicates that, in addition to GDP, other factors such as the cost of capital, the availability of credit and changes in capital gains (asset prices) may also play role.
